Safe harbours on the horizon
Directors should be acutely aware of their personal financial liabilities and in particular their exposure to liability for insolvent trading under the Corporations Act (“the Act”). A difficult issue for directors when things get tough is: When should a director say that the financial risks associated with insolvent trading are so great that a director should not attempt to save a business and rehabilitate a company?
Directors see themselves as uniquely qualified to turn around a company’s fortunes but may be vulnerable to the insolvent trading provisions under the Act. Existing law may impede or prevent proper attempts at informal workouts. A safe harbor, as proposed in a discussion paper released in January 2010 by the Federal Minister for Financial Services, Superannuation and Corporate Law, would have the effect that a director’s duty not to trade whilst insolvent would be considered satisfied if:
- Directors had complied with the business judgement rule embodied in Section 180 of the Act;
- The financial accounts presented a true and fair picture of the company’s financial circumstances;
- The director was receiving restructuring advice from an appropriately experienced and qualified professional as to the feasibility of the company remaining solvent or being returned to solvency within a reasonable time;
- It was the director’s business judgement that the interest of the creditors and members as a whole would be served by pursuing restructuring; and
- The restructuring was being diligently pursued by the director.
The recently completed Financial System Inquiry (“FSI”) (“Murray Inquiry”) examined how the financial system could be positioned to meet Australia’s evolving needs and support Australia’s economic growth. The FSI considered the cost efficiency of external administration, protection of creditor’s rights and promoting confidence in providing credit.
When Malcolm Turnbull, the Minister for Communications, opened the Turnaround Management Association of Australia annual conference in September 2014, an issue he raised was Australia’s unusually severe insolvency laws. He asked: Is it damaging to our economy to cling to a legal construction that results in companies being prematurely extinguished, despite evidence which suggests they are capable of carrying on? He said the best answer was not a wholesale re-write of current laws.
The Murray Inquiry report ultimately concluded that:
- Australia's external administration provisions are generally working well and do not require wholesale revision;
- Submissions had argued that directors should be protected by “safe harbour” provisions and suggested extending the safe harbour protection to the expert restructuring advisers to prevent them from being considered de facto directors;
- The Inquiry recognised that more work needed to be done to assess the potential value of these proposals and recommended that the Government conduct stakeholder consultation on these matters.
Safe harbours are clearly on the horizon. The question is: When will Australia come closer to introducing safe harbour protection for directors? The outlook is that considerable time will be required measurable in years. For example, the insolvency reform process that commenced as an outcome of a 2010 Senate inquiry led to a draft 2013 bill that in turn has led to the Insolvency Law Reform Bill 2014 that if passed will come into effect from 1st February 2016.
In the meantime directors will remain liable for insolvent trading and care should be exercised. PKF is available to assist with any queries in relation to insolvency and insolvent trading and is available to provide advice about a director’s options. Contact any of our PKF Adviser's from around Australia for more advice.