Mathias Cormann (WA, Liberal Party, Minister for Finance) Share this | Hansard source

The government will not be supporting these amendments. By way of background, under the current bill as proposed, a safe harbour is framed as a carve-out from or exception to liability, which means that the starting point is that liability for insolvent trading does not arise, and a director will only be liable if the company is subsequently wound up and the liquidator brings a court action and proves to the civil standard of proof that the conditions for safe harbour were not met.

The amendment as proposed frames the safe harbour as a defence to liability. This would mean that every director who tries to run insolvent in an attempt to restructure or turn the company around will end up in court and will be personally liable for insolvent trading under section 588G of the Corporations Act, unless he or she can prove—to the civil standard of proof—a safe harbour defence.

The current bill is based on extensive consultations over a period of two years, which favoured a carve-out from insolvent trading liability over defence to liability. This is primarily as a result of concerns that a defence would not provide directors of small businesses and start-ups with sufficient comfort to not place a company into administration prematurely so as to avoid the risk of personal liability. The position of stakeholders is supported by the fact that the act currently, in section 588H, provides a defence to insolvent trading liability where a director was provided with information—advice—on the company's current and future state of solvency. This defence has been rarely used, confirming it does not provide directors with the necessary comfort to avoid putting a company into administration prematurely. The proposed changes that the opposition have put forward would therefore defeat the policy intent behind the measure. Without a carve-out, the threat of litigation is generally sufficient to force directors to settle with a liquidator, rather than risk costly and time-consuming litigation.

The Australian Institute of Company Directors has said that the defence model would be counter to the bill's primary objectives:

In the context of a safe harbour designed to facilitate genuine business turnarounds and restructures, this approach is neither appropriate, constructive, nor in accordance with common sense lawmaking. Placing the legal burden on directors would perpetuate the overly strict legislative approach for which our insolvency regime is currently criticised …

The Turnaround Management Association said a traditional defence 'would be a cold comfort to directors', and pointed out that such a model would likely result in under-utilisation of the safe harbour protections. The law firm Ashurst said:

A defence would mean that directors continued to have prima facie liability for insolvent trading in the specified circumstances, subject to their being able to establish the elements of the defence.

By contrast, a carve-out would mean that a director would not be liable for insolvent trading unless the liquidator or other person taking action could establish that the director had failed to satisfy the safe harbour prerequisites.

Public consultation on the exposure draft of the legislation occurred between 28 March and 24 April 2017 and 45 submissions were received. A strong majority of submissions supported the proposed safe harbour carve-out model including ARITA, the Law Council, the Australian Institute of Company Directors, the Turnaround Management Association, AVCAL, the Governance Institute, and the ABA. Only three submitters did not support a safe harbour in principle: the Australian Credit Forum, Narrow Road Capital and SV Partners.