Australia Sails Into Safe Harbour Legislation

16 October 2017

On 12 September 2017, the Treasury Laws Amendment (2017 Enterprise Incentives No.2) Act passed both houses of parliament and received royal assent. The long discussed “Safe Harbour” reforms have now been enacted with the “Ipso Facto” reforms taking effect from 1 July 2018 (if not proclaimed at an earlier date).

On 26 April 2017 we summarised the draft legislation in an article we posted on this website.

http://www.meerkinapel.com.au/news/Articles/Litigation/Safe-Harbour-Insolvency-Reforms

In essence, in relation to the Safe Harbour Reforms, a director may not be liable for insolvent trading in circumstances where a debt is incurred by the company at a time the director suspects that the company may be insolvent and steps are taken by him during that period to develop “one or more courses of action that are reasonably likely to lead to a better outcome for the company”.

Under the new s.588GA(2) of the Corporations Act, 2001 (Cth)(Act), there is a non-exhaustive list which sets out what a director may do to avoid any insolvent trading claim should the company ultimately be wound up, including:

• taking steps to ensure the company is keeping appropriate financial records;

• obtaining advice from an appropriately qualified entity who was given information about the company to give that advice; and

• developing or implementing a plan for restructuring the company to improve its financial position.

However, a director will not be entitled to rely on any “safe harbour” defence, if the company fails to meet its employee entitlements as they fall due or does not comply with its taxation obligations.

In relation to the Ipso Facto Reforms, sections 415D, E and F of the Act will now provide a stay of “ipso facto” clauses which allow for contracts to be terminated in the event that the company goes into administration or scheme of arrangement or has a receiver / controller appointed over its assets and undertaking.

As expressed by us in our April article, we welcome the new amendments and believe they could allow for directors to have the confidence to trade out of short term financial difficulty rather than proceed to a more immediate formal insolvency appointment in order to avoid the onerous insolvent trading laws we have long had in place in Australia.

The new changes will also affect the trading relationship between companies and their suppliers, landlords and bankers who may need to consider how to apply or respond to these new provisions as enacted. 

Please contact Howard Chait by email at hc@meerkinapel.com.au or by phone on 9510 0366 should you want more detail about these new changes.