Analysis of Recent Safe Harbour Proposals versus †Free Samples

Question: Discuss about the Analysis of Recent Safe Harbour Proposals versus Current Legislation on Insolvent Trading in Australia. Answer: Introduction The Australian position on insolvent trading imposes harsh liability on directors who engage the company in trade or incur further debts when it is insolvent or they have reason to believe it would be insolvent(Dorey Rees, 2016). The challenge lies however in determining the point at which the Company becomes insolvent; this uncertainty creates a challenge for directors with regard to undertaking the option of restructuring the company in order to mitigate the evident risk. Recently, the Ministry of Revenue and Financial Services tabled a draft legislation that purposes to reform the current regime on insolvency trading by creating a safe harbour provision in the Corporations Act 2001 (Cth) that would protect directors from personal liability in cases of insolvent trading and allow them the opportunity to undertake restructuring so as to ensure the companys recovery in case of hardship(The Treasury, 2017). The following discourse aims to analyse the differences between the proposed amendments and current legislation on insolvency trading. Further, the study will engage in an analysis of the effectiveness of the proposed amendments, drawing conclusions and making the relevant recommendations to this regard. An Examination of the Differing Elements Issues In order to effectively analyse the differing features of the current legislation and the proposed amendments, it is first and foremost important to highlight the essential features of both provisions. In that regard the following segment will consider the following: Who owes the duty? When is the debt incurred? When is the Company Insolvent? What are the available defences? What are the consequences imposed in case of liability? Rules and Application The current position reflected in the Corporations Act 2001 (Cth) under section 588G imposed a duty on the company director to prevent insolvent trading by the company. The purpose of this statutory provision, which would find a director personally liable for incurring debt when a company is insolvent, is to discourage commercial dishonesty or irresponsibility on the part of directors. This was the position held in Edwards v Australian Securities and Investments Commission [2009] NSWCA 424. The duty is therefore owed by a company director; inclusive of shadow and de facto directors, holding the position at the time the company incurs the debt. The proposed amendments uphold the duty owed by directors to the company and other stakeholders to prevent insolvent trading, the provisions of s 588G are unaffected by the Exposure Draft, however, the harshness of the liability imposed on directors is mitigated as shall be seen in the subsequent discussions. As aforementioned, current legislation presents some uncertainties with regard to the determination of when the company is insolvent. Section 95A of the Act 2001 describes insolvency as the inability to cover debts if and when they become due. As such, should a director cause a company to incur debt at such a time then they would be in breach of their duties under s 588G. Powell v Fryer [2001] SASC 59 outlines an objective test that courts have relied on to determine insolvency(Redmond, 2013). According to the holding, in this case, insolvency is determined after having considered the organizations financial position in its entirety. The introduction of recent amendments mitigates the liability arising from the position set by the provisions highlighted above. Section 588GA proposed under the Exposure Draft provides a safe harbour for directors from the liability imposed by the s 588G penalty. Currently, failure to prevent insolvent trading leads to an automatic contravention of the duty imposed above. However, with the safe harbour provision, directors who undertake measures to restructure and attempt to create a better outcome for the company are excluded from the liability imposed by current legislation. Another difference in the two instruments with regard to insolvent trading presents itself in the defences available to directors. Currently, s 588H of the Act 2001 avails a director various defences to avoid personal liability. These defences include reasonable expectation of solvency on the part of the director, reliance on reasonable information from a competent person as regards the solvency of the company, absence from a managerial position due to illness of any other plausible reason at the time of insolvency and finally that reasonable measures were taken to prevent the incurrence of debt(Lewis, 2010). Reasonable steps provided under s 588H (5) can be construed to provide a safe harbour where directors could opt for voluntary administration as illustrated in Statewide Tobacco Services Ltd v Morley (1990) 8 ACLC 827. The Exposure Draft, however, considers these defences as other defences and expressly provides a safe harbour provision for directors. The provision acts as a prim ary defence for a director who undertakes a reasonable course of action to create a better outcome for the organization and its creditors where they suspect a likelihood of insolvency. This defence, however, is limited to debts incurred when a director commences a course of action up to and when the action is completed or found to be unenforceable(Deloitte, 2017). Further, as previously mentioned, the test for solvency is determined by an examination of the organisations financial status. The financial position of any organisation is evinced in its books or financial statements. According to the Exposure Draft, and organisations books can be relied on to support the defence for safe harbour, however, this provision is limited in as far as the director fails to permit or present the books for inspection or where they are found to have concealed or destroyed some information. As such, where directors fail to deliver books for inspection they cannot rely on them as evidence to support the safe harbour defence(Arnold Bloch Leibler, 2017). However, an exception lies where the director can prove they lacked possession of the books in question and made all reasonable efforts to obtain them to no avail. The current legislation lacks this provision with regard to the reliance of books as evidence for a defence; it is limited to the safe harbour provisi on which is novel to Australian Corporations Law. Evidently, as discussed above, the differences between the two provisions lie in the weight of liability accorded to directors in their duty to prevent insolvent trading. The duty is still owed by directors but the defences available are expanded to avail a safe harbour which cures the uncertainty created by the determination of a companys insolvency. The consequences for breach, however, remain the same in that both civil and criminal penalties are accorded where liability is ascertained. An Analysis of the Effectiveness of the Safe Harbour Proposals in the Exposure Draft The proposal was met with a majority of positive feedback by way of submissions and deliberations on the parliamentary floor. Scholars and Institutions expressed support, albeit with recommendations, as to the proposed amendments. Geoff Green, in his submissions as a Chartered Accountant and formerly registered liquidator found the framework set out in the draft with regard to the safe harbour provisions as strong and sensible(Green, 2010). Anderson et al. also cite support for the provision expressing that the evidentiary burden in conjunction with the criteria relied on by court to determine the legitimacy of the course of action limits the scope in which one can engage in illegal phoenix activity in the guise of restructuring as such creating an environment that enables business rescues while limiting the scope for abuse through fraudulent actions. Despite the strong show of support, the provision has been challenged with regard to effectiveness on the following issues. The Harmer Report (1998), outlines various principles and objectives to be considered in the development of Insolvency Law in Australia. As such, legal provisions and amendments should embody these objectives. Among these guidelines is the principle that anylaw regarding insolvency should support the commercial and economic processes of the community. As such, thelaw should ensure it creates an environment that allows for the most suitable solution that would least disrupt the commercial and economic processes in question. Tested against this principle the safe harbour provision can be described as effective as it cultivates an environment that would allow for the continuity of the business by availing an opportunity for recovery through restructuring which if successful ensures commercial and economic processes are maintained and even improved. The Australian Institute of Company Directors (AICD), submitted additional criticism to the proposed safe harbour provision citing uncertainty and complexity as the contributory factors. According to the Institute, the provision for better outcome as expressed under s 588GA sets a prerequisite on directors to evaluate possible outcomes to their decided course of action in comparison to the outcomes available in becoming a Chapter 5 body corporate in order to rely on the proposed defence. The AICD finds the requirement formidable as it is uncertain to the extent that it relies on an analysis of predictions on potential future events. Further, it is complex as the analysis is juxtaposition with a Chapter 5 Corporate body; as per the law there are various ways for a company to become a Chapter 5 Corporate body and as such analysing the possible outcomes from all these avenues would be unduly onerous(AICD, 2017). Herbert Smith Freehills hold a similar opinion citing that the better outco me test sets the bar too high as such creating an element of complexity and uncertainty(Apathy, et al., 2017). Clayton Utz in their submissions outlined support for the proposal citing that it would be effective in creating a safe harbour for company directors with regard to the personal liability imposable for insolvent trading(Clayton Utz, 2017). Further, they recognised that the criteria adopted under s 588GA, which is subjective, is suitable and relevant to the better outcome provision. However, according to Clayton Utz, this effectiveness is limited in as far as the proposal is enforced as a carve-out rather than a defence. That is, in as far as the provision serves as an exclusion from the provisions on civil insolvency trading, rather as a defence in proceedings regarding breach of duty. Further, according to Dong Lin, in order to be effective, the provision should expressly adopt the concept of viability rather than solvency; that is the law should require that directors efforts be made towards long-term viability over the solvency of the organisation(Lin, 2017). Viability is a concept that considers the long-term success and survival of the company over solvency which in essence is a short-term objective. Solvency should be achieved and maintained; this is only possible if the course of action is driven by viability. Conclusions It is evident therefore from the discussion above that the provisions of the Exposure Draft steer a cultural shift among directors as they would encourage greater involvement in analysing and mitigating financial challenges. This is because it creates an environment in which directors can explore restructuring options that are likely to lead to a better outcome for the organisation and its creditors. This effectiveness, however, is limited to the extent that it bears some uncertainties and complexities that inhibit its success. This is because the criteria set to analyse the viability of the course of action are too high, further as they involve an analysis of future predictions they are marred by uncertainty. However, it is evident that the general concept behind the provision is effective; the challenge arises in its enforceability. As such, it can be concluded that the provisions of the Exposure Draft are effective subject to further amendments. Recommendations In consideration of the discourse thus far, the study recommends that further amendments be made to the current proposal. The spirit of the proposal is rational; however, as outlined above, certain challenges are likely to arise in the course of implementation. The research, therefore, recommends as follows: Clarity is effected as to whether the provision is acting as a carve-out or a defence; the study recommends a carve-out approach. The criteria as to better outcome test are evaluated to mitigate rising uncertainties as discussed. The provision is based on the concept of viability over insolvency. References AICD, 2017. National Innovation and Science Agenda- Improving Corporate Insolvency Law: Submissions, s.l.: The Treasury. Apathy, P., Spencer, S. Flippin, L., 2017. Australian Government Releases Draft Insolvent Trading and Ipso Facto Legislation. [Online] Available at: https://www.herbertsmithfreehills.com/latest-thinking/australian-government-releases-draft-insolvent-trading-and-ipso-facto-legislation [Accessed 19 September 2017]. Arnold Bloch Leibler, 2017. Improving Corporate Insolvency Laws Submission, Melbourne: Arnold Bloch Leibler. Australian Law Reform Commission , 1998. Australian Law Reform Commission General Insolvency Inquiry (Harmer Report), s.l.: ALRC. Clayton Utz, 2017. Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017 - Submission to Treasury from Clayton Utz , Sydney: Clayton Utz. Deloitte, 2017. Deloitte Submissions: Safe Harbour. s.l.:Deloitte. Dorey, I. Rees, E., 2016. The Harbour is Not Yet Safe-Reform on the Move in Australia, s.l.: KL Gates. Edwardss v Australian Securities and Investments Commission (2009) NSWCA 424. Green, G., 2010. Submission on Exposure Draft, s.l.: The Treasury. Lewis, P. L., 2010. Insolvent trading defences after Hall v Poolman. Company and Securities Law Journal, Volume 28, pp. 396-410. Lin, D., 2017. Submission Regarding Insolvency Law Change, s.l.: University of New South Wales. Powell v Fryer (2001) SASC 59. Redmond, P., 2013. Corporations and Financial Markets Law. 6th ed. s.l.:LBC. Statewide Tobacco Services Ltd v Morley (Morley's Case) (1990) 8 ACLC 827. The Parliament of the Commonwealth of Australia, 2017. Exposure Draft: Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017, s.l.: Treasury. The Treasury, 2017. National Innovation and Science Agenda Improving corporate insolvency law. [Online] Available at: https://treasury.gov.au/consultation/national-innovation-and-science-agenda-improving-corporate-insolvency-law/ [Accessed 20 September 2017].