Do the New Safe Harbour Laws Quell Insolvency Fears?

Safe-harbour reforms that deliver greater protection for directors of financially-stressed companies have passed through both houses of federal parliament.

Currently awaiting royal assent, the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017 amends the Corporations Act 2001 (Cth) and aims to protect directors acting to undertake a company restructure in response to insolvency -- where it will receive a better result for stakeholders.

Minister for small business Michael McCormack said in parliament that Australia's current insolvency trading laws put too much focus on stigmatising and penalising failure.
The amendments will create a "safe harbour" for honest and diligent company directors from personal liability for insolvent trading if they are pursuing a restructure outside formal insolvency. 

"Broadly, [these] measures encourage Australians to take a risk, leave behind the fear of failure and be more innovative and ambitious. More often than not, entrepreneurs will fail several times before they experience success and will generally learn valuable lessons during the process. Helping these entrepreneurs to succeed requires a cultural shift." McCormack said. 
Rigby Cooke Lawyers partner Demian Walton is sceptical that the new safe harbour legislation will settle the personal liability fears of current and aspiring company directors in the construction industry.

ASIC figures showed 403 construction businesses entered external administration in the June 2017 quarter, up 7.2 per cent on the June 2016 quarter.

Walton said the ambiguity of language contained in the new law and the reliance on judges to interpret it will do little to reassure company directors of its protection.

“The legislation fails to give directors specific steps they can take to be assured of protection in attempting to steer a company back to solvency," he said.

It is essentially left to judges to determine on a case-by-case basis, and potentially years after the event, whether any company director seeking the protection of this "safe harbour" will actually receive it.

“It also fails to solve the key issue that company directors will be exposed to personal liability for insolvent trading from the moment they reasonably suspect their company has become unable to pay its debts on time unless they call in the external administrators," Walton said.

Walton believe that a more effective reform would be to give directors a mechanism to obtain legally-binding approval for their reconstruction plan from a registered liquidator at the time of its development and implementation.

There thought process behind such a move was that directors could find out whether they have the protection of the safe harbour and be alerted to any adjustments needed for their plan to ensure that protection.

“What may later be found were only temporary cashflow issues could still be enough to bring down a business, destroying value, costing jobs and leaving creditors (who these laws are meant to protect) unpaid," Walton said.

“Under the new law, directors could potentially only find out years later whether they made it into the ‘safe harbour’, whether they remained in it for long enough, or whether it was really a booby trap."