Smooth Sailing for Innovative Directors in Troubled Times?

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January 2018 – In September 2017, the Federal Government passed amendments to the Corporations Act 2001 (Act) incorporating “safe harbour” provisions to assist directors to be more innovative and prevent viable companies from being placed into administration or liquidator for fear of the directors being held personally liable for trading whilst insolvent.  This change is a part of the Federal Government’s National Innovation and Science Agenda, which continues to attempt to strike a balance between the protection of creditors of a company and encouraging companies and their directors to be more innovative and taking appropriate risks to continue to trade the company out of troubled waters and grow their businesses.

Prior to these changes, creditors could pursue directors personally if a director of a company was found to have been trading whilst insolvent.  As a consequence, directors may have to place a company into voluntary administration or liquidation at the earliest signs that the company may be unable to pay its debts, in order to avoid becoming personally liable for trading whilst insolvent.

The new “safe harbour” provision, section 588GA of the Act, is designed to prevent companies from being placed into administration or liquidation, in circumstances where the company remains viable.  The new safe harbour laws enable company directors to avoid liability in circumstances where they incur a debt in connection with a “course of action” that would be reasonably likely to lead to a “better outcome” for the company.  A “better outcome” is defined in section 588 GA(7) of the Act as:

…an outcome that is better for the company than the immediate appointment of an administrator, or liquidator, of the company”.

Section 588GA(2) sets out a non-exhaustive list of factors to consider when determining whether a “course of action” is “reasonably likely to lead to a better outcome” for the company and it’s creditors.  Those factors include, but are not limited to, whether the director has taken steps to:

  1. be properly inform him or herself of the company’s financial position;
  2. prevent any misconduct by the company’s officers and/or employees that could adversely affect the company’s ability to pay its debts;
  3. ensure the company is keeping appropriate financial records (appropriate for the size and nature of the company);
  4. obtain advice from an appropriately qualified entity who has sufficient information to give appropriate advice; and
  5. develop and implement a plan for restructure the company to improve its position.

A director has the ‘evidential burden’ to show that he or she took such steps.  You cannot rely on the “safe harbour” provisions without it.  A note of caution, however, these protections are not available if the company has not complied with payment of all employee entitlements as they fall due and all taxation obligations.

In July 2018, the Act will be amended to further assist companies in their restructuring process with the staying of ipso facto clauses in contracts.  It is not uncommon for a company to have entered contracts with an ipso facto clause.  This clause enables a party to terminate the contract in the event of an act of insolvency.  Prior to this amendment, companies had limited prospect of successfully restructuring their businesses.  This new provision removes a major hurdle for companies seeking to restructure their businesses.

Catherine Fox
Partner
15 January 2018

By | 2018-02-05T09:15:46+00:00 February 2nd, 2018|Business, Insolvency|Comments Off on Smooth Sailing for Innovative Directors in Troubled Times?