Commonwealth legislation enacted on 18 September 2017 introduces the Safe Harbour regime, which significantly expands the power of directors to manage their businesses and mitigate personal liability for insolvent trading.
This is one of the Government’s principal reforms to encourage directors to save businesses, preserve goodwill and achieve business growth.
Then and now
Previously, where a director had reason to suspect that a company was insolvent they could be held personally liable, under Section 588G of the Corporations Act 2001 (Cth), for debts incurred from trading during that time. Now, a director who suspects that their company is insolvent can enter the Safe Harbour regime.
Under the new regime, a director has protection against personal liability for liabilities incurred during periods of suspected insolvency. Specifically, this protection applies to actions taken that are reasonably likely to improve the position of a business relative to the immediate appointment of a liquidator or administrator. To qualify under the Safe Harbour regime, a business must first satisfy requirements set out by the legislation.
Our experience is that adverse unforeseen events, particularly in fast-growth or expanding businesses, often require a debt or equity injection earlier than budgeted to compensate for those events. Prior to the reforms, experienced directors had a dilemma – either continue to trade and hope to see the business into profitability, or appoint an insolvency practitioner. If the business continued to trade, and then subsequently failed, the directors would be personally liable for insolvent trading.
The Safe Harbour regime reforms, properly applied, increase the likelihood of successful business recovery by reducing the personal disincentive for directors to continue with a value-creating turnaround strategy.
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Disclaimer: This communication is intended to provide commentary and general information only. It should not be considered as advice. Formal advice should be sought in managing any specific matter of interest arising from this communication.