Australia considers introducing safe harbour for insolvent trading
By Darise Ogden

CONCERNS ARISING out of the Global Financial Crisis have led the Australian Government to consider introducing a “safe harbour” to protect companies seeking to reorganise outside of Australia’s external administration regime.

In a discussion paper released in January, the Government acknowledged that “placing a company into external administration may not always be the most appropriate method to [effect] a business rescue or to otherwise realise value for the benefit of the company’s creditors and members”. However, while it suggested work-outs might offer a better opportunity to effect such objectives, it also noted that the lack of available credit and the civil and criminal liability facing directors who permitted a company to trade while insolvent, meant some companies were placed into external administration “prematurely”.

The discussion paper, Insolvent trading: A safe harbour for reorganisation attempts outside of external administration, has suggested the safe harbour regime could be introduced through the introduction of a business judgement rule, which would relieve directors of liability for insolvent trading “where they have acted according to a particular formula to make a business judgement that the interests of the company’s body of creditors as a whole would be best served by pursuing the work-out”; or through the introduction of a moratorium on insolvent trading, which would not apply to “dishonest insolvent trading”.

The discussion paper suggested the following elements could be required to satisfy the proposed business judgement rule:

• “The financial accounts and records of the company presented a true and fair picture of the company’s financial circumstances at the time that the rule was invoked;
• “The director was informed by restructuring advice from an appropriately experienced and qualified professional with access to those accounts and records, as to the feasibility of and means for ensuring that the company remains solvent, or that it is returned to a state of solvency within a reasonable period of time;
• “It was the director’s business judgement that the interests of the company’s body of creditors as a whole, as well as members, were best served by pursuing restructuring; and
• “The restructuring was diligently pursued by the director” (at. 5.3.6).

The proposed business judgement rule, said the discussion paper at 5.3.7, “would provide a high degree of protection for directors from the threat of personal liability for insolvent trading, while making bona fide attempts at company reorganisation outside of external administration”.

The Federal Government has also announced that it will amend the Corporations Act 2001, to reverse the effect of Sons of Gwalia v Margaretic (2007) 231 CLR 160, which led to some shareholders (those with certain compensation claims) being able to prove alongside creditors in a winding-up. The Government decided to overturn Sons of Gwalia because of the decision’s potential negative impact on business rescue procedures. “Any direct benefits to aggrieved shareholders arising from non-subordination are outweighed by the negative impacts on shareholders generally as a result of restrictions on access to, and increases in, the cost of debt financing for companies,” said Minister for Financial Services, Superannuation and Corporate Law Chris Bowen.