Update: Insolvency safe harbour reform

Further progress has been made on this important reform, with the bill now referred to an Inquiry of the Senate Economics Legislation Committee, writes Carissa Simons.

Work on the insolvency safe harbour reforms has continued to be a policy priority for the AICD’s Advocacy team. The Turnbull Government’s Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017) will, if passed, fulfil the Government’s commitment to improve Australia’s insolvency laws.

The draft legislation amends the Corporations Act 2001 to create a safe harbour for company directors from personal liability for insolvent trading if the company is undertaking a restructure outside formal insolvency. It also makes certain contractual rights unenforceable while a company is restructuring under certain formal insolvency processes.

In a major step towards accomplishing this reform, on 22 June 2017 the bill passed the House of Representatives with the support of the ALP. The Senate has now referred the bill to an Inquiry of the Senate Economics Legislation Committee.

The AICD welcomes the progress of this important reform. Australia’s existing insolvency laws are among the harshest in the world. The perverse and unintended consequence of the current framework is that directors are forced down the path of formal insolvency too early in circumstances where reasonable prospects of recovery exist, destroying value and jobs.

The AICD has provided a written submission to the Senate Inquiry, in which we indicated strong support for the bill. In that submission, we also highlighted the Bill’s significant safeguards to protect employee entitlements, ensure tax reporting obligations are met, and secure compliance with obligations to provide assistance in subsequent formal insolvency processes.

The AICD also pointed to ways the legislation could be further improved, particularly through the introduction of the concept of a ‘rational belief’, to reduce the risk of complexity, uncertainty and hindsight bias and give responsible directors greater confidence in relying on the safe harbour.

The introduction of a safe harbour for directors which provides sufficient certainty, flexibility, safeguards for stakeholders and functionality is a critical step in building a culture of restructure and recovery in corporate Australia. Furthermore, it will help support a culture of innovation and entrepreneurship for startup and scaleup businesses.

The AICD’s Advocacy team is continuing to liaise with members of the Government, Opposition and the Greens on the bill.

Related viewing

AICD Policy Adviser, Matthew McGirr, explains what safe harbour reform entails and what it would mean for companies.