Section 588G of the Corporations Act 2001(“the Act”) imposes a duty on company directors to prevent a company from trading whilst insolvent. A director can be personally liable for debts incurred by a company if, at the time the debt is incurred, there are reasonable grounds for suspecting that the company is insolvent. Breaching this provision can give rise to both civil and criminal penalties. The focus of the section is on the timing of when the debts are incurred rather than on the conduct of the directors in incurring the debt. The existing statutory defences to an insolvent trading action were very limited.
The Commonwealth Government identified a number of potentially undesirable outcomes of the existing legislation. They were:
The New Law
From 19 September 2017, Section 588GA now exempts directors from civil liability under Section 588G provided that:
The directors bear the evidential onus of proving that the course of action is reasonably likely to lead to a better outcome. Factors relevant to this include whether the directors are:
There are also vitiating factors which render unavailable the safe harbour of Section 588GA.They are failures to:
What is not taken into account?
Obviously the safe harbour provisions afford company directors a measure of protection that was not there before. But:
Summary / Conclusions
The implementation of the safe harbour provisions into the Act gives much greater protection to company directors in making decisions to overcome the draconian insolvent trading laws. However, there are pitfalls within the new legislation which directors should be cognisant of in implementing the safe harbour regime. At present there are no reported cases interpreting the legislation. Until then directors should tread cautiously in their application of the provisions but should not be deterred from doing so as the benefits to directors, their companies and society can be significant.
Thanks to the contribution of Phil Stern.