Safe Harbour reforms – protection from insolvent trading and PIAs - december 2017
Dec 15 2017
Safe Harbour Reforms – Protection From Insolvent Trading
Section 588G of the Corporations Act 2001 (“the Act”) imposes a duty on a director to prevent a company from trading whilst insolvent. A director may be held personally liable for debts incurred by the company if at the time the debts are incurred there are reasonable grounds to suspect that the company is insolvent.
On 18 September 2017, the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017 (“the Bill”) received Royal Assent. The Bill amended the Act to create Section 588GA of the Act, which establishes a safe harbour for directors of an insolvent company to protect them against civil liability for contraventions of the insolvent trading provisions under the Act
The aim of the safe harbour provisions is to facilitate more successful company restructures outside of a formal insolvency process where doing so would achieve a better outcome for a company than immediately appointing an Administrator or Liquidator.
Safe harbour provides an opportunity for directors who closely monitor the financial position of their business to engage early with financial distress and actively take steps to either restructure the business or, if that is not possible, to move quickly to formal insolvency.
Whether a course of action is reasonably likely to lead to a better outcome for the company will vary on a case-by-case basis depending on the individual company and its circumstances at the time the decision is made.
While the new law is intended to allow companies to be restructured outside of a formal insolvency process, some companies may not be able to recover and will still proceed to voluntary administration or liquidation.
Relevant factors for determining whether a course of action would be reasonably likely to lead to a better outcome for the company would include where a director:
- Obtained advice from an appropriately qualified adviser
- Properly informed themselves about the company’s financial position.
- Took steps to prevent misconduct by officers and employees of the company.
- Took appropriate steps to ensure the company maintained adequate financial books and records.
- Developed or implemented a plan to restructure the company to improve its financial position.
The safe harbour period will end at the earliest of the following times:
- The director fails to take any course of action within a reasonable period;
- When the course of action ends;
- When the course of action stops being reasonably likely to lead to a better outcome for the company;
- When the company goes into voluntary administration or liquidation.
Safe harbour is open only to a director who:
- Ensures that the company complies with its obligations to pay its employee entitlements (including superannuation obligations) on time.
- lEnsures that all statutory obligations are met including ATO returns, notices or any other documents required by taxation laws.
- Complies with their obligations to assist an Administrator, Liquidator or Controller in a formal insolvency.
- Provides a Report as to Affairs to an external administrator.
- Provides the books and records of the company to an external administrator
Where a director fails to provide access to books and records, the director will be prevented from being able to rely on books and records as evidence that they took a course of action as part of the safe harbour.
A director will have the evidential burden of demonstrating that the safe harbour defence is available. A Liquidator pursuing an insolvent trading claim would bear the legal burden to show that the course of action that was taken was one not reasonably likely to lead to a better outcome for the company.
The safe harbour will also protect a holding company from liability resulting from debts incurred by a subsidiary where the director of the subsidiary has the benefit of safe harbour and where the holding company took reasonable steps to ensure the director of the subsidiary had the benefit of safe harbour.
Personal Insolvency Agreements – An Alternative To Bankruptcy
A Personal Insolvency Agreement (“PIA”) is a legally binding agreement between a debtor and creditors, which allows a debtor to come to an arrangement to settle debts to avoid bankruptcy
A debtor is eligible to propose a PIA if:
- They are unable to pay their debts when they are due and payable
- They are present in Australia or have a residential or business connection to Australia
- They have not proposed a PIA in the previous six months.
There are no debt, asset or income limits to be eligible for a PIA. The length of the PIA will depend on the proposal to creditors.
To commence a PIA, a debtor appoints a Registered Trustee as their Controlling Trustee. The role of the Controlling Trustee is to take control of and investigate the debtor’s affairs and financial circumstances. During the Controlling Trustee period, proceedings by creditors against the debtor are stayed. A debtor is not able to deal with their property without the consent of their Controlling Trustee.
The Controlling Trustee will assist the debtor to make an offer to creditors, prepare the proposal for a PIA and convene a meeting of creditors within 25 days to vote on the proposal.
The proposal to creditors may provide for a third party to pay a lump sum to pay part or all of the debtor’s liabilities. The aim of the proposal is to provide a better return to creditors than bankruptcy.
A PIA releases a debtor from unsecured debts. A PIA will not release a debtor from the following debts:
- Debts incurred by fraud
- Debts under a maintenance agreement or order
- Court-ordered fines
- HELP debts
The proposal for a PIA is considered at a creditors’ meeting. For creditors to accept the PIA proposal, a special resolution is required. To be passed, a special resolution requires a majority in number of creditors and at least 75% of the dollar value of creditors at the meeting, in person or by proxy, voting in favour. The proposal, if accepted, is binding on all unsecured creditors, even if they voted against the debtor’s proposal.
The Controlling Trustee will notify the creditors of the outcome of the meeting and the result of the proposal will be recorded on the National Personal Insolvency Index.
If a proposal is accepted, a PIA is prepared and executed. A Trustee is appointed to administer the PIA. The Trustee informs the creditors on the progress of the PIA and deals with the provisions of the agreement.
A creditor may apply to Court to make the debtor bankrupt if the PIA fails.
To find out more about the information covered in this newsletter or to discuss any issues pertaining to personal or corporate insolvency matters, telephone on 03 8636 3333 or email any of the following contacts:
Stephen Michell - Director smichell@pcipartners.com.au
Philip Newman - Director pnewman@pcipartners.com.au
David Quin- Director dquin@pcipartners.com.au
Clyde White - Director cwhite@pcipartners.com.au
Warren White - Principal wwhite@pcipartners.com.au
Sean Pulverman- Principal spulverman@pcipartners.com.au
Kylie Wright- Principal kwright@pcipartners.com.au
Sophie Zapantis - Senior Manager szapantis@pcipartners.com.au
Peter Fraczek - Manager pfraczek@pcipartners.com.au
Frank Ntim - Manager fntim@pcipartners.com.au
Anna Odrzywolska -Manager aodrzywolska@pcipartners.com.au
All material contained in this newsletter is written by way of general comment. No material should be accepted as authoritative advice and any reader wishing to act upon the material should first contact our office for properly considered professional advice which will take into account your own specific conditions. No responsibility is accepted for any action taken without advice by readers of the material contained herein. Liability limited by a Scheme approved under Professional Standards Legislation.