Review Into Operation Of Australian Insolvent Trading “Safe Harbour” Protections Announced.

 

8 October 2021

 

 

A review has commenced of the “safe harbour” regime that was introduced in 2017 to provide directors with a greater degree of protection from liability under Australia’s insolvent trading provisions.

 

The safe harbour regime is contained in section 588GA and related sections of the Corporations Act 2001 (Cth) (the Corporations Act). We summarised the key aspects of the safe harbour framework in our previous article.
 

At the time of its introduction, it was intended that there would be an independent review of the operation of the safe harbour protections after two years (the Review). The requirement to undertake the Review was enshrined in section 588HA of the Corporations Act. However the commencement of the Review was delayed, in particular by the impacts of the COVID pandemic.
 

However, the Government of the Commonwealth of Australia (the Government) has recently confirmed the Review will now go ahead, announcing details of the panel members and terms of reference for the Review.
 

As part of the Review process, a consultation paper was subsequently issued on 3 September 2021 (the Consultation Paper), setting out a number of questions on the safe harbour regime for stakeholder feedback. Submissions on the Consultation Paper are due by 1 October 2021.
 

The requirement to hold the Review
 

Section 588HA of the Corporations Act requires a review of the safe harbour regime “as soon as practicable after the last day of the 2 year period” following the commencement of the safe harbour provisions. The 2 year period expired on 19 September 2019.
 

The requirements in section 588HA for the Review include consideration of the impact of the availability of safe harbour on: (i) the conduct of directors; and (ii) the interests of creditors and employees, and any other matter the Minister considers relevant.
 

The Review Panel
 

The Government noted, in a Budget-related announcement in May 2021, that it would be conducting the Review. That announcement stated the purpose of the Review was to “review whether the insolvent trading safe-harbour provisions, which were introduced in 2017 and designed to promote a culture of entrepreneurship and innovation by providing breathing space for distressed businesses, remain fit for purpose.”
 

On 19 August 2021, the Government confirmed the appointment of a three member panel to conduct the Review consisting of Genevieve Sexton (the chair), Stephen Parbery and Leanne Chesser (the Review Panel). The Review Panel is made up of a lawyer and two insolvency practitioners.
 

It is intended that the Review will be conducted over a three month period with a written report to be provided and tabled in Parliament in accordance with section 588HA(4) of the Corporations Act.

The terms of reference for the Review
 

The terms of reference for the Review were released by Treasury on 26 August 2021. These provide further details on what the Review will cover, as follows:
 

1. The review will examine and report on the impact of the availability of the safe harbour (provided for by sections 588GA and 588GB of the Corporations Act 2001) on:
    

   1. the conduct of directors, including decisions to seek advice about the company’s financial position or to undertake a corporate restructure or turnaround plan outside of a formal insolvency process;

   2. the conduct of directors of small and medium-sized enterprises and any particular issues experienced by these directors when engaging with financial distress;

   3. the interests of creditors and employees of those companies, including benefits gained under a successfully implemented restructure or turnaround plan or in formal insolvency processes; and

   4. the effectiveness of the underlying prohibition on insolvent trading and associated penalties.
       

2. The review will examine and report on the role of advisers in the safe harbour.
    

Consultation Paper
 

The consultation process for the Review formally opened on 3 September 2021, with the issuance of the Consultation Paper, and will close on 1 October 2021.
 

The Consultation Paper seeks feedback from:
 

“…stakeholders who may have experience in corporate distress and turnaround, including the degree to which they have engaged with the safe harbour reforms, both from an adviser and any potential subsequent administrator or liquidator point of view, and (for those involved in companies whose directors utilised the safe harbour defence) their experience engaging with the reforms in practice. The perspective of creditors and other stakeholders is also sought.”
 

The following questions are then listed for discussion:
 

1. Are the safe harbour provisions working effectively?

2. What impact has the availability of the safe harbour had on the conduct of directors?

3. What impact has the availability of the safe harbour had on the interests of creditors and employees?

4. How has the safe harbour impacted on, or interacted with, the underlying prohibition on insolvent trading?

5. What was your experience with the COVID-19 insolvent trading moratorium, and has that impacted your view or experience of the safe harbour provisions?

6. Are you aware of any instances where safe harbour has been misused?

7. Are the pre-conditions to accessing safe harbour appropriate?

8. Does the law provide sufficient certainty to enable its effective use?

9. Is clarification required around the role of advisers, including who qualifies as advisers, and what is required of them?

10. Is there sufficient awareness of the safe harbour, including among small and medium enterprises?

11. In relation to potential qualified advisors, what barriers or conflicts (if any) limit your engagement with companies seeking safe harbour advice?

12. Are there any other accessibility issues impacting its use?

13. Are there any improvements or qualifications you would like to see made to the safe harbour provisions and/or the underlying prohibition on insolvent trading?
     

We understand that the Review Panel also intends to undertake “round table” discussions with various stakeholder groups.
 

Comment
 

The terms of reference for the Review (and some of the questions in the Consultation Paper) are fairly broad in the context of the three month time period within which the Review Panel is required to report.
 

The Review is seeking to cover the impacts of safe harbour on: directors of various sized businesses; interests of creditors and employees; the role of advisers; and the effectiveness of the insolvent trading prohibition itself.
 

The Review also comes at a time where the Government is undertaking a number of consultation process in respect of a number of matters of law reform in the restructuring and insolvency space, including the recent consultation paper on improving creditors’ schemes of arrangement.
 

Given all of these law reform consultations involve issues of some complexity it may be challenging to collect and synthesize fully considered feedback from stakeholders during the fairly short time periods prescribed for each of these processes.
 

It is also of interest to note that for a portion of the period since the safe harbour protections were introduced they were effectively sidelined by the temporary coronavirus safe harbour which was available from March to December 2020.
 

Whilst the general market view seems to be that the safe harbour regime is working reasonably well, there are no doubt some improvements that could be made to the legislation now that we have the benefit of having seen it in operation for several years. The appointment of the Review Panel is therefore to be welcomed.