Arnold Bloch Leibler partner Genevieve Sexton
A review of insolvent trading safe harbour provisions introduced into the Corporations Act in 2017 paints a picture of a confusing policy initiative that was poorly implemented. The government’s response to the review has been to say the provisions are providing “considerable assistance”.
The review panel, chaired by Arnold Bloch Leibler partner Genevieve Sexton, found a general lack of awareness of the provisions and uncertainty about how they operate, which the panel said should be addressed through clarification of the provisions and ongoing education and guidance.
And it questioned the applicability of the provisions to the SME sector.
The safe harbour provisions are a carve-out to the prohibition on insolvent trading in the Corporations Act. Under the provisions, the insolvent trading prohibition does not apply to company directors who, after beginning to suspect their company is or may become insolvent, start developing a course of action that is “reasonably likely to lead to a better outcome for the company”.
The provisions were designed to give financially distressed but viable companies more “breathing space” to restructure their affairs and, in so doing, to encourage entrepreneurship. The review was commissioned to assess whether the provisions are achieving their aims.
The review panel said submissions by firms that undertake formal insolvency appointments noted that there have been relatively few instances of directors raising safe harbour protection when companies have been placed in liquidation.
However, it found that safe harbour is being used, mostly by larger companies.
Submissions highlighted a lack of certainty concerning the operation of the provisions. Lack of awareness was particularly marked in the SME sector.
Submissions from creditors indicated that they were suspicious of the provisions, particularly the lack of a requirement for directors to advise stakeholders of the implementation of their safe harbour plan.
The review said there is “little to no” judicial guidance and no Treasury, ASIC or industry-endorsed best practice guidance to help directors understand how the safe harbour provisions operate in practice. It recommended this shortcoming be addressed.
“The overwhelming feedback from the panel’s consultation is that it needs to be easier for directors to find simple, plain English guides on their duties and responsibilities in relation to their personal liabilities for insolvent trading and the existence of the safe harbour provisions,” it said.
The panel made a number of technical recommendations to simplify the provisions and clarify their meaning, so they can be more readily understood and applied. The government has accepted most of these recommendations.
Assistant Treasurer Michael Sukkar said in a statement that “overall, the review found that the safe harbour offers considerable assistance in encouraging turnarounds”.
The panel also pointed out that the safe harbour provisions may not be of much use to SMEs. “The fact that the personal wealth of SME directors is often heavily intertwined with their company, through personal guarantees and potential personal liability for tax debts, means they are unlikely to seek safe harbor protection. This is because the safe harbour provisions will not protect them from existing or potential personal liability.”
It said the provisions were introduced partly to drive “cultural change” by encouraging directors to keep control of their companies, engage early with possible insolvency and take reasonable risks to facilitate recovery.
“To the extent that the policy to encourage a culture of entrepreneurship was focused on start-ups, we query whether the safe harbour provisions would apply to many in practice,” it said.
The review panel went out on a limb and called for a holistic review of the country’s insolvency regime. It said the last comprehensive review was 30 years ago and since then Australia has become part of a globalised economy and global capital markets.
“A comprehensive review that not only considers the past 30 years of jurisprudence on our current insolvency regime but also assesses the impact of our insolvency laws on our trading partners, on domestic and international capital markets and other economic and social factors would be a significant and invaluable development.”
In its response to the review, the government “noted” this recommendation.