Reforms in Australia’s Insolvency laws

This article discusses the reforms in Australia's insolvency laws, particularly the introduction of safe harbour norms for insolvent company directors. It examines the effectiveness of these changes and provides recommendations to improve upon the newly formed provisions.

(Word Count: 2018)

Reforms in Australia’s Insolvency laws 2
Table of Contents
Introduction.....................................................................................................................................3
Then and Now..................................................................................................................................3
Safe Harbour Proposals in Part 1 of the Amendment.....................................................................4
The way ahead.................................................................................................................................7
Conclusion........................................................................................................................................7
Reference List..................................................................................................................................9

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Introduction
The Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Act, 2017 (Cth) brought a
new respite to the directors of the corporations, in context of the insolvency norms. The reason
for this is the introduction of new safe harbour norms for the insolvent company directors
(Renfrey and Gaertner, 2017). The act brought amendments to the commonwealth
Corporations Act, 2001. The amendment act, through Part 1, provides for safe harbour to be
created for the directors, which allows for the directors to be safeguarded from personal
liabilities in cases of insolvent trading, in cases of restructuring of company, based on certain
conditions (Australasian Legal Information Institute, 2017).
The theme of these amendments are to bring changes for the company directors, which would
in turn allow them to be engaged, early on, in the cases of financial hardships. This would also
allow for directors to introduce necessary measures when the company is under control and for
taking the reasonable risks, which would allow for the recovery of company to be facilitated, as
against getting the company pushed into voluntary administration or liquidation in a premature
manner (Murphy, 2017). Through this analysis, these very provisions have been examined, in
context of comparison from earlier provisions, the effectiveness of these changes, and the
required recommendations to improve upon the newly formed provisions.
Then and Now
The insolvency laws as were applicable in the nation, before the amendments were brought in
on September 18, 2017, made the directors personal liable for debts which had been
undertaken by the company, when the company becomes insolvent as a result of such debts
being undertaken or where such debts are undertaken when the company had already been
insolvent (Lacey, 2017). The erstwhile provisions were covered under section 588G of the 2001
act, whereby the directors were prohibited from being indulged in insolvent trading (Paolini,
2014). This section provided the aforementioned prohibition on directors from being indulged
in insolvent trading, based on reasonable grounds being present to suspect the insolvent

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conditions or chances of the company of becoming insolvent (Cassidy, 2006). The theme with
which this section operated was to stop or to bring down the instances where the directors
would allow the company to incur debts, which the company would not be able to pay back due
to its financial conditions. However, a key point noted in the context of this section was that the
directors became discouraged from making attempts towards premature formal insolvency
procedures. This was so even when even when the company could have been in running or
could have been in operation for a longer time period (Minter Ellison, 2017).
The 2017 act brought a new section for the 2001 act and this was lined up with the earlier
provisions. The new section has two subsections, and these are sections 588GA (1) and 588GA
(2) (Rigby Cooke Lawyers, 2017). As per these subsections, the directors would no longer be
personally liable for such debts which are undertaken by the company when it had already
been insolvent, where it can be shown that a course of action(s) was being adopted by the
director, which was expected to bring better result for the company in a reasonable manner,
and that the incurred debts were related to this course of connection, in a direct or indirect way
(EY, 2017).
Safe Harbour Proposals in Part 1 of the Amendment
The safe harbour provisions, as have been covered under the amendment act, puts forth a
better result for the companies facing difficult times, instead of being simply put to an end.
These provisions show efforts being made to save the company, instead of simply shutting it
down. The provisions provide for alternatives to be looked at, instead of brining in an
administrator or a liquidator to wrap up everything. These are basically a non-exhalative
guidance on the correct path, where the directors are allowed to look at different venues, and
to make the decision based on theme of doing the best for the company (Maiden and Papaleo,
2017).
The directors, under this part, are required to inform themselves about the company’s financial
position; to take the necessary steps of stopping the employees/ officers from being indulged in
misconduct which could have a negative impact over the ability of company in paying its debts;

Reforms in Australia’s Insolvency laws 5
taking the requisite steps to ensure that the proper financial records are maintained and kept
by the company, which comply with the size and the nature of company; the advice being
obtained by the directors from such entities which are properly qualified, where the reliance is
placed by directors on such externally provided advice; and in preparing and adopting the plan
whereby the company is restructured in order to bring improvements in its financial positioning
(Federal Register of Legislation, 2017).
Where the measures covered here are not fulfilled, the provisions covered under safe harbour
sections of the 2017 act can no longer be availed. It is important to note here that just the
result of the actions which have been proposed, have to be assessed and this is possibly the
most remarkable aspect of these amendments. Another substantial point relates to the areas
where the safe harbour provisions would not apply. These provisions cannot be made use of by
the directors, when the use of information or books of the company is being undertaken in
context of the reasonable course of action having being undertaken by the directors, but such
assisting material was not provided to the liquidator or the administrator upon a formal request
being made for this material. The safe harbour provisions would also be unavailable in such
cases where the company fails in complying with certain statutory or mandatory obligations; for
instance, superannuation, the employee entitlements and also the tax report requirements
(Davies, 2017).
As briefed upon earlier, the 2001 act has been amended in order to introduce the safe harbour
provisions, which provide the safeguards to the directors from being personally liable, which
stem from the provisions of insolvent trading under the section 588G provisions, in such cases
where restructuring is adopted by the company in place of adopting formal insolvency. These
provisions enable the company in taking up more debts, where the reasonable course of action
is adopted in proper time frame, which is expected to put the company in a better position
(Narushima, 2017). These are noteworthy provisions as they have reformed the way businesses
are carried out, along with brining in new energy in the economy. As has been quoted by the
AICD (Australian Institute of Company Directors), the newly presented provisions enable the

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company directors in taking some common sense based steps in order to rehabilitate distressed
businesses and to infuse new life in them (Hughes, Powers and Sommer, 2017).
The point which further works in favour of the new provisions is the fact that with these
provisions, a platform is presented for greater engagement of the experienced directors and
also presents the opportunity for more investments. The reason for this stems from the fact
that with these provisions, a possibility of saving the business from the condition of formal
insolvency is presented, which upon being adopted, allows for better results to be obtained for
the employees and creditors of the company. This is particularly true in situations where these
stakeholders have an interest in the company’s long term success. Though, it is important to
note that such provisions are conditional pursuant to specific requirements being fulfilled, as
have been highlighted earlier, in order to be effective in safeguarding the directors and for the
protection of the stakeholders to be truly ensured (McGirr, 2017).
The aforementioned discussion highlighted upon the course of action, which has to be
reasonable, which the directors pursue. The protection under the safe harbour rules are
provided only when the reasonable course of action is adopted in a manner which brings better
result for the company in comparison to being wound up through different modes. The
safeguards presented through the new provisions become applicable from the time when the
course of action is adopted by the director, upon the director becoming aware of the possible
chances of company becoming insolvent. Again, the emphasis is on better result for the
company, instead of opting for the end of the company (Hughes, Powers and Sommer, 2017).
A substantial element of these provisions is covered under the objective basis of the
assessment of new provisions. The safe harbour safeguards are available from the time when
the director initiates the preparations and starts the deliberations in context of course of
action, along with the particular situation revolving around the case. If the safe harbour
provisions are carefully analysed, it becomes clear that these have wide application. This is in
the sense that the directors have been given enough latitude for choosing a specific course of
action, which would be analysed for being proper based on complexity, nature and size of

Reforms in Australia’s Insolvency laws 7
company for which such course of action is being adopted (Hughes, Powers and Sommer,
2017).
The way ahead
The provisions which have been proposed through the 2017 amendment are substantial and
are required to be continued. One of the reasons for these is that these provisions allow for the
directors to look at other options, instead of simply giving up on a company, which could
otherwise be saved, by applying the experience of directors in saving such companies. These
provisions are quite comprehensive and present landmark provisions. Another one major
aspect of these provisions is the direct and indirect debts being included. The safe harbour
provisions are related to such debts which the directors incur in both direct and indirect
manner, when they adopt a course of action, which aims at bringing better result for the
company. This is substantial as it allows the directors to go ahead and adopt different
strategies. Even when the debts are not directly related to the strategy meant to put the
company in a better position, they would be allowed to be undertaken and the director would
be safeguarded for taking them, where these are required for adopting the chosen course of
action (Apáthy, Spencer and Cronk, 2017).
The very drafting of the 2017 amendments has been done in a manner, to safeguard the
interests of the different stakeholder groups of the company, instead of merely being focused
on the company. A point which is worthy clarifying in context of safe harbour rules is that these
provisions do not restrict the company from being placed in voluntary liquidation or from
entering in receivership. The only restriction is on letting the company go, without any efforts
being made. So, where a feasible course of action is not available, the directors are not required
to adopt any course of action just for the sake of it, and have to go forward with voluntary
administration or liquidation (Apáthy, Spencer and Cronk, 2017).

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Conclusion
To bring the discussion to its end, it can be concluded that the erstwhile insolvency provisions,
covered under the 2001 act, put the directors under risk for taking any action in stopping the
companies from being wound up. This problem led to the 2017 amendments, particularly the
ones covered under Part 1 of the 2017 amendments, which are related to the safe harbour
rules. With the safe harbour provisions, the directors have been given with the freedom of
choosing a reasonable course of action, which would put the company in a better position, and
in order to do so, the directors are free to take or incur debts, even when the company is
insolvent. This freedom allows for the directors to make attempts to save the company, instead
of simply wrapping it up, owing to the earlier provisions, which would make them personally
label for incurring debts when the company was insolvent. The newly introduced provisions are
noteworthy as they have brought a fresh respite to the directors of the company and have
given them the freedom to save the company, where it is feasible to do so. With the manner in
which the provisions have been drafted, it is recommended that the newly created provisions
are upheld.

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Reference List
Apáthy, P., Spencer, S., and Cronk, L. (2017) Revised And Improved: New Insolvent Trading Safe
Harbour And Ipso Facto Legislation Passes Through The Senate. [Online] Herbert Smith Freehills.
Available from: https://www.herbertsmithfreehills.com/latest-thinking/revised-and-improved-
new-insolvent-trading-safe-harbour-and-ipso-facto-legislation [Accessed 23/04/18]
Australasian Legal Information Institute. (2017) Treasury Laws Amendment (2017 Enterprise
Incentives No. 2) Bill 2017. [Online] Australasian Legal Information Institute. Available from:
http://classic.austlii.edu.au/au/legis/cth/bill_em/tla2017ein2b2017537/memo_0.html
[Accessed 23/04/18]
Cassidy, J. (2006) Concise Corporations Law. 5th ed. NSW: The Federation Press.
Davies, X. (2017) Summary of the Safe Harbour Insolvency Law Reforms. [Online] Linkedin.
Available from: https://www.linkedin.com/pulse/summary-safe-harbour-insolvency-law-
reforms-xian-davies [Accessed 23/04/18]
EY. (2017) How safe is Safe Harbour? Understanding how to navigate financial stress. [Online]
EY. Available from: http://www.ey.com/Publication/vwLUAssets/ey-how-safe-is-safe-harbour-
understanding-how-to-navigate-financial-stress/$FILE/ey-how-safe-is-safe-harbour-
understanding-how-to-navigate-financial-stress.pdf [Accessed 23/04/18]
Federal Register of Legislation. (2017) Treasury Laws Amendment (2017 Enterprise Incentives
No. 2) Act 2017. [Online] Federal Register of Legislation. Available from:
https://www.legislation.gov.au/Details/C2017A00112 [Accessed 23/04/18]
Hughes, M., Powers, L., and Sommer, A. (2017) Insolvent trading safe harbour and ipso facto
reform exposure draft legislation and explanatory materials released. [Online] Minter Ellison.
Available from: https://www.minterellison.com/articles/insolvent-trading-safe-harbour-and-
ipso-facto-reform-exposure-draft-legislation-released [Accessed 23/04/18]

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Lacey, A. (2017) Safe Harbour and Ipso Facto reforms pass into law. [Online] McCabes. Available
from: https://www.mccabes.com.au/safe-harbour-ipso-facto-reforms-pass-law/ [Accessed
23/04/18]
Maiden, S.C.S., and Papaleo, N. (2017) Safe Harbour laws commence operation and ipso facto
laws pass into law. [Online] Commbar Matters. Available from:
http://www.commbarmatters.com.au/2017/09/25/safe-harbour-laws-commence-operation-
and-ipso-facto-laws-pass-into-law/ [Accessed 23/04/18]
McGirr, M. (2017) Landmark ‘safe harbour’ legislation, a reform that could energise businesses
and the economy, has now passed Parliament, and will become law. [Online] Australian
Institute of Company Directors. Available from:
https://aicd.companydirectors.com.au/membership/the-boardroom-report/volume-15-issue-
9/safe-harbour-reform-passes-senate-almost-certain-to-become-law [Accessed 23/04/18]
Minter Ellison. (2017) Insolvent trading safe harbour and ipso facto reforms pass the
Parliament. [Online] Minter Ellison. Available from:
https://www.minterellison.com/articles/insolvent-trading-safe-harbour-and-ipso-facto-
reforms-pass-the-parliament [Accessed 23/04/18]
Murphy, J. (2017) Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017.
[Online] Parliament of Australia. Available from:
https://www.aph.gov.au/Parliamentary_Business/Bills_Legislation/bd/bd1718a/18bd033
[Accessed 23/04/18]
Narushima, H. (2017) Director safe harbour and ipso facto insolvency reforms receive Royal
Assent. [Online] Lexology. Available from: https://www.lexology.com/library/detail.aspx?
g=a210c2a0-0858-4077-9e72-8c39e9b39a10 [Accessed 23/04/18]
Paolini, A. (2014) Research Handbook on Directors Duties. Northampton, Massachusetts, United
States: Edward Elgar.

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Renfrey, B., and Gaertner, S. (2017) Insolvency law reform - stay on enforcement of ipso facto
clauses. [Online] Lexology. Available from: https://www.lexology.com/library/detail.aspx?
g=b03c7293-25f8-4a15-b958-30fe05bfe564 [Accessed 23/04/18]
Rigby Cooke Lawyers. (2017) ‘Safe Harbour’ and ‘ipso facto’ insolvency reforms - what do they
mean and what will they do? [Online] Rigby Cooke Lawyers. Available from:
http://www.rigbycooke.com.au/latest/safe-harbour-and-ipso-facto-insolvency-reforms
[Accessed 23/04/18]