Proposed insolvency reforms indicate helpful news for directors and the economy
In welcome news for directors and the economy, the Federal Government has announced draft legislation for insolvency law reform that incorporates a proposal to introduce a safe harbour provision.
Various stakeholders have led the debate on the need for insolvency reform, and the draft legislation echoes many of these stakeholders’ vital requests. It is the next step in a significant journey that will, in our view, provide better outcomes for companies, their employees and their creditors.
From our perspective, the draft legislation seems to have taken on board guidance from a wide variety of stakeholders. It seeks to provide a feasible safe harbour that has the potential to improve productivity, protect jobs and encourage a culture of entrepreneurship and innovation.
The reforms aim to allow a company to restructure outside of a formal insolvency process where doing so will achieve a better outcome for the company and its creditors as a whole.
Under the proposed reforms, the civil insolvent trading provisions would not apply ‘to a person and a debt’ which is incurred in relation with a ‘course of action’ that is reasonably likely to lead to a ‘better outcome’ for the company and the company’s creditors as a whole, in contrast to moving to formal insolvency.
To depend on the safe harbour, directors will only need to provide evidence of the ‘course of action’ they took. However, a director purely hoping or aspiring that things will ultimately turn around will not be protected.
Pertinent elements in determining whether a course of action was reasonable include whether a director ‘is properly informing himself or herself of the company’s financial situation’, ‘obtaining appropriate advice’ and ‘developing or implementing a plan for restructuring the company’.
Furthermore, a director will not be able to depend on the safe harbour if they fail to provide entitlements to employees, or fail to provide an administrator or liquidator with access to the company books or secondary evidence after an appropriate request.
Submissions on the draft legislation closed on 24 April. More to come on this live issue.
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Important: This information is not advice. Readers should not act on the basis of the material included in this publication. We recommend that formal advice be obtained before acting in the area covered herein.