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Analysis of Recent Safe Harbour Proposals

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Added on  2020-03-23

Analysis of Recent Safe Harbour Proposals

   Added on 2020-03-23

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An Analysis of Recent Safe Harbour Proposals 1AN ANALYSIS OF RECENT SAFE HARBOUR PROPOSALS VERSUS CURRENTLEGISLATION ON INSOLVENT TRADING IN AUSTRALIAby [Author(s) name(s)]:Word Count: 2016TABL5541: Corporations & Business Associations Law(Tutor)University of New South Wales(City and State)(Date)
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An Analysis of Recent Safe Harbour Proposals 2Table of ContentsIntroduction................................................................................................................................3An Examination of the Differing Elements...............................................................................3Issues......................................................................................................................................3Rules and Application............................................................................................................4Conclusion..............................................................................................................................6An Analysis of the Effectiveness of the Safe Harbour Proposals in the Exposure Draft..........6Conclusions................................................................................................................................8Recommendations......................................................................................................................9References................................................................................................................................10
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An Analysis of Recent Safe Harbour Proposals 3An Analysis of Recent Safe Harbour Proposals versus Current Legislation on InsolventTrading in AustraliaIntroductionThe Australian position on insolvent trading imposes harsh liability on directors who engagethe company in trade or incur further debts when it is insolvent or they have reason to believeit would be insolvent[ CITATION Dor16 \l 2057 ]. The challenge lies however indetermining the point at which the Company becomes insolvent; this uncertainty creates achallenge for directors with regard to undertaking the option of restructuring the company inorder to mitigate the evident risk. Recently, the Ministry of Revenue and Financial Servicestabled a draft legislation that purposes to reform the current regime on insolvency trading bycreating a ‘safe harbour’ provision in the Corporations Act 2001 (Cth) that would protectdirectors from personal liability in cases of insolvent trading and allow them the opportunityto undertake restructuring so as to ensure the company’s recovery in case ofhardship[ CITATION The173 \l 2057 ]. The following discourse aims to analyse thedifferences between the proposed amendments and current legislation on insolvency trading.Further, the study will engage in an analysis of the effectiveness of the proposedamendments, drawing conclusions and making the relevant recommendations to this regard. An Examination of the Differing Elements IssuesIn order to effectively analyse the differing features of the current legislation and theproposed amendments, it is first and foremost important to highlight the essential features ofboth provisions. In that regard the following segment will consider the following:1.Who owes the duty?2.When is the debt incurred?3.When is the Company Insolvent?
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An Analysis of Recent Safe Harbour Proposals 44.What are the available defences?5.What are the consequences imposed in case of liability?Rules and ApplicationThe current position reflected in the Corporations Act 2001 (Cth) under section 588Gimposed a duty on the company director to prevent insolvent trading by the company. Thepurpose of this statutory provision, which would find a director personally liable for incurringdebt when a company is insolvent, is to discourage commercial dishonesty or irresponsibilityon the part of directors. This was the position held in Edwards v Australian Securities andInvestments Commission [2009] NSWCA 424. The duty is therefore owed by a companydirector; inclusive of shadow and de facto directors, holding the position at the time thecompany incurs the debt. The proposed amendments uphold the duty owed by directors to thecompany and other stakeholders to prevent insolvent trading, the provisions of s 588G areunaffected by the Exposure Draft, however, the harshness of the liability imposed ondirectors is mitigated as shall be seen in the subsequent discussions. As aforementioned, current legislation presents some uncertainties with regard to thedetermination of when the company is insolvent. Section 95A of the Act 2001 describesinsolvency as the inability to cover debts if and when they become due. As such, should adirector cause a company to incur debt at such a time then they would be in breach of theirduties under s 588G. Powell v Fryer [2001] SASC 59 outlines an objective test that courtshave relied on to determine insolvency[ CITATION Red13 \l 2057 ]. According to theholding, in this case, insolvency is determined after having considered the organization’sfinancial position in its entirety. The introduction of recent amendments mitigates the liabilityarising from the position set by the provisions highlighted above. Section 588GA proposedunder the Exposure Draft provides a safe harbour for directors from the liability imposed bythe s 588G penalty. Currently, failure to prevent insolvent trading leads to an automatic
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