- The new safe harbour from insolvent trading is the most significant change to corporate insolvency law since the introduction of voluntary administration in 1993.
- Helping directors of small to medium-sized enterprises obtain safe harbour protection represents an exciting opportunity for solicitors when, previously, insolvent companies were mandated to commence external administration.
Australia’s prohibition on companies trading whilst insolvent (Corporations Act, s 588G) has often been the subject of criticism. Until recently, Australia was said to have the strictest insolvent trading prohibition in the developed world (Hon Martin CJ, opening address to the 16th National Conference of the Insolvency Practitioners’ Association of Australia, 28 May 2009). No other developed country prohibited companies from incurring debts whilst insolvent, thereby mandating commencement of formal insolvency proceedings (Harris, Jason ‘Director Liability for Insolvent Trading: Is the cure worse than the disease?’ (2009) Australian Journal of Corporate Law, Vol 23, No 3).
Background: watering down of the insolvent trading prohibition
Under the existing insolvent trading prohibition, a director of a company may be held personally liable for debts incurred by a company whilst it is insolvent. Broadly, section 588G provides that a director will be found to have breached their duty if:
- the person was a director at the relevant time;
- the company was actually insolvent;
- the company incurred a debt; and
- there were reasonable grounds for the director to suspect insolvency.