Discuss about the Reforms in Australia Insolvency Laws for Amendments.
The Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Act, 2017 (Cth) brought a new respite to the directors of the corporations, in context of the insolvency norms. The reason for this is the introduction of new safe harbour norms for the insolvent company directors (Renfrey and Gaertner, 2017). The act brought amendments to the commonwealth Corporations Act, 2001. The amendment act, through Part 1, provides for safe harbour to be created for the directors, which allows for the directors to be safeguarded from personal liabilities in cases of insolvent trading, in cases of restructuring of company, based on certain conditions (Australasian Legal Information Institute, 2017).
The theme of these amendments are to bring changes for the company directors, which would in turn allow them to be engaged, early on, in the cases of financial hardships. This would also allow for directors to introduce necessary measures when the company is under control and for taking the reasonable risks, which would allow for the recovery of company to be facilitated, as against getting the company pushed into voluntary administration or liquidation in a premature manner (Murphy, 2017). Through this analysis, these very provisions have been examined, in context of comparison from earlier provisions, the effectiveness of these changes, and the required recommendations to improve upon the newly formed provisions.
The insolvency laws as were applicable in the nation, before the amendments were brought in on September 18, 2017, made the directors personal liable for debts which had been undertaken by the company, when the company becomes insolvent as a result of such debts being undertaken or where such debts are undertaken when the company had already been insolvent (Lacey, 2017). The erstwhile provisions were covered under section 588G of the 2001 act, whereby the directors were prohibited from being indulged in insolvent trading (Paolini, 2014). This section provided the aforementioned prohibition on directors from being indulged in insolvent trading, based on reasonable grounds being present to suspect the insolvent conditions or chances of the company of becoming insolvent (Cassidy, 2006). The theme with which this section operated was to stop or to bring down the instances where the directors would allow the company to incur debts, which the company would not be able to pay back due to its financial conditions. However, a key point noted in the context of this section was that the directors became discouraged from making attempts towards premature formal insolvency procedures. This was so even when even when the company could have been in running or could have been in operation for a longer time period (Minter Ellison, 2017).
The 2017 act brought a new section for the 2001 act and this was lined up with the earlier provisions. The new section has two subsections, and these are sections 588GA (1) and 588GA (2) (Rigby Cooke Lawyers, 2017). As per these subsections, the directors would no longer be personally liable for such debts which are undertaken by the company when it had already been insolvent, where it can be shown that a course of action(s) was being adopted by the director, which was expected to bring better result for the company in a reasonable manner, and that the incurred debts were related to this course of connection, in a direct or indirect way (EY, 2017).
The safe harbour provisions, as have been covered under the amendment act, puts forth a better result for the companies facing difficult times, instead of being simply put to an end. These provisions show efforts being made to save the company, instead of simply shutting it down. The provisions provide for alternatives to be looked at, instead of brining in an administrator or a liquidator to wrap up everything. These are basically a non-exhalative guidance on the correct path, where the directors are allowed to look at different venues, and to make the decision based on theme of doing the best for the company (Maiden and Papaleo, 2017).
The directors, under this part, are required to inform themselves about the company’s financial position; to take the necessary steps of stopping the employees/ officers from being indulged in misconduct which could have a negative impact over the ability of company in paying its debts; taking the requisite steps to ensure that the proper financial records are maintained and kept by the company, which comply with the size and the nature of company; the advice being obtained by the directors from such entities which are properly qualified, where the reliance is placed by directors on such externally provided advice; and in preparing and adopting the plan whereby the company is restructured in order to bring improvements in its financial positioning (Federal Register of Legislation, 2017).
Where the measures covered here are not fulfilled, the provisions covered under safe harbour sections of the 2017 act can no longer be availed. It is important to note here that just the result of the actions which have been proposed, have to be assessed and this is possibly the most remarkable aspect of these amendments. Another substantial point relates to the areas where the safe harbour provisions would not apply. These provisions cannot be made use of by the directors, when the use of information or books of the company is being undertaken in context of the reasonable course of action having being undertaken by the directors, but such assisting material was not provided to the liquidator or the administrator upon a formal request being made for this material. The safe harbour provisions would also be unavailable in such cases where the company fails in complying with certain statutory or mandatory obligations; for instance, superannuation, the employee entitlements and also the tax report requirements (Davies, 2017).
As briefed upon earlier, the 2001 act has been amended in order to introduce the safe harbour provisions, which provide the safeguards to the directors from being personally liable, which stem from the provisions of insolvent trading under the section 588G provisions, in such cases where restructuring is adopted by the company in place of adopting formal insolvency. These provisions enable the company in taking up more debts, where the reasonable course of action is adopted in proper time frame, which is expected to put the company in a better position (Narushima, 2017). These are noteworthy provisions as they have reformed the way businesses are carried out, along with brining in new energy in the economy. As has been quoted by the AICD (Australian Institute of Company Directors), the newly presented provisions enable the company directors in taking some common sense based steps in order to rehabilitate distressed businesses and to infuse new life in them (Hughes, Powers and Sommer, 2017).
The point which further works in favour of the new provisions is the fact that with these provisions, a platform is presented for greater engagement of the experienced directors and also presents the opportunity for more investments. The reason for this stems from the fact that with these provisions, a possibility of saving the business from the condition of formal insolvency is presented, which upon being adopted, allows for better results to be obtained for the employees and creditors of the company. This is particularly true in situations where these stakeholders have an interest in the company’s long term success. Though, it is important to note that such provisions are conditional pursuant to specific requirements being fulfilled, as have been highlighted earlier, in order to be effective in safeguarding the directors and for the protection of the stakeholders to be truly ensured (McGirr, 2017).
The aforementioned discussion highlighted upon the course of action, which has to be reasonable, which the directors pursue. The protection under the safe harbour rules are provided only when the reasonable course of action is adopted in a manner which brings better result for the company in comparison to being wound up through different modes. The safeguards presented through the new provisions become applicable from the time when the course of action is adopted by the director, upon the director becoming aware of the possible chances of company becoming insolvent. Again, the emphasis is on better result for the company, instead of opting for the end of the company (Hughes, Powers and Sommer, 2017).
A substantial element of these provisions is covered under the objective basis of the assessment of new provisions. The safe harbour safeguards are available from the time when the director initiates the preparations and starts the deliberations in context of course of action, along with the particular situation revolving around the case. If the safe harbour provisions are carefully analysed, it becomes clear that these have wide application. This is in the sense that the directors have been given enough latitude for choosing a specific course of action, which would be analysed for being proper based on complexity, nature and size of company for which such course of action is being adopted (Hughes, Powers and Sommer, 2017).
The provisions which have been proposed through the 2017 amendment are substantial and are required to be continued. One of the reasons for these is that these provisions allow for the directors to look at other options, instead of simply giving up on a company, which could otherwise be saved, by applying the experience of directors in saving such companies. These provisions are quite comprehensive and present landmark provisions. Another one major aspect of these provisions is the direct and indirect debts being included. The safe harbour provisions are related to such debts which the directors incur in both direct and indirect manner, when they adopt a course of action, which aims at bringing better result for the company. This is substantial as it allows the directors to go ahead and adopt different strategies. Even when the debts are not directly related to the strategy meant to put the company in a better position, they would be allowed to be undertaken and the director would be safeguarded for taking them, where these are required for adopting the chosen course of action (Apáthy, Spencer and Cronk, 2017).
The very drafting of the 2017 amendments has been done in a manner, to safeguard the interests of the different stakeholder groups of the company, instead of merely being focused on the company. A point which is worthy clarifying in context of safe harbour rules is that these provisions do not restrict the company from being placed in voluntary liquidation or from entering in receivership. The only restriction is on letting the company go, without any efforts being made. So, where a feasible course of action is not available, the directors are not required to adopt any course of action just for the sake of it, and have to go forward with voluntary administration or liquidation (Apáthy, Spencer and Cronk, 2017).
Conclusion
To bring the discussion to its end, it can be concluded that the erstwhile insolvency provisions, covered under the 2001 act, put the directors under risk for taking any action in stopping the companies from being wound up. This problem led to the 2017 amendments, particularly the ones covered under Part 1 of the 2017 amendments, which are related to the safe harbour rules. With the safe harbour provisions, the directors have been given with the freedom of choosing a reasonable course of action, which would put the company in a better position, and in order to do so, the directors are free to take or incur debts, even when the company is insolvent. This freedom allows for the directors to make attempts to save the company, instead of simply wrapping it up, owing to the earlier provisions, which would make them personally label for incurring debts when the company was insolvent. The newly introduced provisions are noteworthy as they have brought a fresh respite to the directors of the company and have given them the freedom to save the company, where it is feasible to do so. With the manner in which the provisions have been drafted, it is recommended that the newly created provisions are upheld.
Reference List
Apáthy, P., Spencer, S., and Cronk, L. (2017) Revised And Improved: New Insolvent Trading Safe Harbour And Ipso Facto Legislation Passes Through The Senate. [Online] Herbert Smith Freehills. Available from: https://www.herbertsmithfreehills.com/latest-thinking/revised-and-improved-new-insolvent-trading-safe-harbour-and-ipso-facto-legislation [Accessed 23/04/18]
Australasian Legal Information Institute. (2017) Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017. [Online] Australasian Legal Information Institute. Available from: https://classic.austlii.edu.au/au/legis/cth/bill_em/tla2017ein2b2017537/memo_0.html [Accessed 23/04/18]
Cassidy, J. (2006) Concise Corporations Law. 5th ed. NSW: The Federation Press.
Davies, X. (2017) Summary of the Safe Harbour Insolvency Law Reforms. [Online] Linkedin. Available from: https://www.linkedin.com/pulse/summary-safe-harbour-insolvency-law-reforms-xian-davies [Accessed 23/04/18]
(2017) How safe is Safe Harbour? Understanding how to navigate financial stress. [Online] EY. Available from: https://www.ey.com/Publication/vwLUAssets/ey-how-safe-is-safe-harbour-understanding-how-to-navigate-financial-stress/$FILE/ey-how-safe-is-safe-harbour-understanding-how-to-navigate-financial-stress.pdf [Accessed 23/04/18]
Federal Register of Legislation. (2017) Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Act 2017. [Online] Federal Register of Legislation. Available from: https://www.legislation.gov.au/Details/C2017A00112 [Accessed 23/04/18]
Hughes, M., Powers, L., and Sommer, A. (2017) Insolvent trading safe harbour and ipso facto reform exposure draft legislation and explanatory materials released. [Online] Minter Ellison. Available from: https://www.minterellison.com/articles/insolvent-trading-safe-harbour-and-ipso-facto-reform-exposure-draft-legislation-released [Accessed 23/04/18]
Lacey, A. (2017) Safe Harbour and Ipso Facto reforms pass into law. [Online] McCabes. Available from: https://www.mccabes.com.au/safe-harbour-ipso-facto-reforms-pass-law/ [Accessed 23/04/18]
Maiden, S.C.S., and Papaleo, N. (2017) Safe Harbour laws commence operation and ipso facto laws pass into law. [Online] Commbar Matters. Available from: https://www.commbarmatters.com.au/2017/09/25/safe-harbour-laws-commence-operation-and-ipso-facto-laws-pass-into-law/ [Accessed 23/04/18]
McGirr, M. (2017) Landmark ‘safe harbour’ legislation, a reform that could energise businesses and the economy, has now passed Parliament, and will become law. [Online] Australian Institute of Company Directors. Available from: https://aicd.companydirectors.com.au/membership/the-boardroom-report/volume-15-issue-9/safe-harbour-reform-passes-senate-almost-certain-to-become-law [Accessed 23/04/18]
Minter Ellison. (2017) Insolvent trading safe harbour and ipso facto reforms pass the Parliament. [Online] Minter Ellison. Available from: https://www.minterellison.com/articles/insolvent-trading-safe-harbour-and-ipso-facto-reforms-pass-the-parliament [Accessed 23/04/18]
Murphy, J. (2017) Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017. [Online] Parliament of Australia. Available from: https://www.aph.gov.au/Parliamentary_Business/Bills_Legislation/bd/bd1718a/18bd033 [Accessed 23/04/18]
Narushima, H. (2017) Director safe harbour and ipso facto insolvency reforms receive Royal Assent. [Online] Lexology. Available from: https://www.lexology.com/library/detail.aspx?g=a210c2a0-0858-4077-9e72-8c39e9b39a10 [Accessed 23/04/18]
Paolini, A. (2014) Research Handbook on Directors Duties. Northampton, Massachusetts, United States: Edward Elgar.
Renfrey, B., and Gaertner, S. (2017) Insolvency law reform – stay on enforcement of ipso facto clauses. [Online] Lexology. Available from: https://www.lexology.com/library/detail.aspx?g=b03c7293-25f8-4a15-b958-30fe05bfe564 [Accessed 23/04/18]
Rigby Cooke Lawyers. (2017) ‘Safe Harbour’ and ‘ipso facto’ insolvency reforms – what do they mean and what will they do? [Online] Rigby Cooke Lawyers. Available from: https://www.rigbycooke.com.au/latest/safe-harbour-and-ipso-facto-insolvency-reforms [Accessed 23/04/18]
Essay Writing Service Features
Our Experience
No matter how complex your assignment is, we can find the right professional for your specific task. Contact Essay is an essay writing company that hires only the smartest minds to help you with your projects. Our expertise allows us to provide students with high-quality academic writing, editing & proofreading services.
Free Features
Free revision policy
$10Free bibliography & reference
$8Free title page
$8Free formatting
$8How Our Essay Writing Service Works
First, you will need to complete an order form. It's not difficult but, in case there is anything you find not to be clear, you may always call us so that we can guide you through it. On the order form, you will need to include some basic information concerning your order: subject, topic, number of pages, etc. We also encourage our clients to upload any relevant information or sources that will help.
Complete the order form
Once we have all the information and instructions that we need, we select the most suitable writer for your assignment. While everything seems to be clear, the writer, who has complete knowledge of the subject, may need clarification from you. It is at that point that you would receive a call or email from us.
Writer’s assignment
As soon as the writer has finished, it will be delivered both to the website and to your email address so that you will not miss it. If your deadline is close at hand, we will place a call to you to make sure that you receive the paper on time.
Completing the order and download