Australia: Safe harbour defence for directors is on the way

Safe harbour defence for directors is on the way

This week has arguably been one of the most significant we have seen since the introduction of voluntary administration in 1993, when it comes to the reform of Australia's insolvency regime. Transformational change is officially afoot, with the introduction of a safe harbour defence for directors in Australia expected mid-2017.

In August 2014, DibbsBarker urged Treasury and the Financial System Inquiry (FSI) by way of submission copied to the then Minister for Communications (now his honourable Prime Minister of Australia), to contemplate "transformational change that alters our business landscape, providing greater scope for innovation and entrepreneurship, including in the face of failure". Our submissions to Treasury and the FSI spoke of the benefits to Australia in pursuing such change, noting that such reform would "better encourage collaborative innovation through periods of change and financial vulnerability".

Government signals change

On Monday, the Federal Government announced its National Innovation & Science Agenda, signalling that legislation will be passed in mid-2017 to implement three key changes to Australian insolvency laws to encourage entrepreneurship as follows:

• reducing the current default bankruptcy period from three years to one year
• introducing a 'safe harbour' for directors from personal liability for insolvent trading if they appoint a restructuring adviser to develop a turnaround plan for the company
• making 'ipso facto' clauses, which allow contracts to be terminated solely due to an insolvency event, unenforceable if a company is undertaking a restructure.

That same day, the Productivity Commission released its Business Set-Up, Transfer and Closure Final Report in which it set out a detailed proposal for the shape that a safe harbour defence might take.

What might the safe harbour defence look like?

The Productivity Commission's proposed framework includes the following elements:

• a company will have available to it a safe harbour, which will operate as a defence to insolvent trading, where the company makes and records a decision to appoint an adviser with a view to constructing a turnaround plan
• the safe harbour will commence upon the appointment of the adviser
• the adviser must be a registered adviser, and must have at least 5 years' experience as an insolvency and turnaround practitioner
• at the time of the appointment the adviser must be provided with proper books and records
• at the time of the appointment the company must be (and the adviser must certify that the company is) solvent, even if it becomes insolvent during the safe harbour period
• the appointment must be for the express purpose of providing restructuring advice focused on the company's continued solvency and viability
• the adviser will end their appointment, and the safe harbour period will end, if the company is no longer viable
• the directors must demonstrate that they took all reasonable steps to pursue the restructuring as advised by the adviser
• the safe harbour will end once the restructuring advice has been (reasonably) implemented.

Having made various submissions over the past 18 months about the need for insolvency law reform and cultural reform in Australia, with aspects of those submissions being expressly noted by the Commission in its Final Report, DibbsBarker is excited to see that real change is on its way. Importantly, it is transformational change that is intended to promote early intervention and proactivity on the part of directors. It signals a shift away from blame and fear of failure, towards a more collaborative, supportive approach.

In this paper, we provide a more detailed summary of the Productivity Commission's proposed framework for a safe harbour defence in Australia.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.