Directors now protected from insolvent trading

Is your company unable to pay its debts?

Section 588G of the Corporations Act 2001 imposed a duty on a director to prevent a company from engaging in insolvent trading. If a director allowed their company to continue trading after it became insolvent and allowed their company to incur debts, then they became personally liable for those debts.

A consequence of this section was that it encouraged directors to prematurely engage their company in formal insolvency processes to protect themselves, even where the company could have traded successfully.

New sections 588GA & 588GB provide “Safe Harbour Provisions” from 18 September 2017.

Under these “Safe Harbour Provisions” a director will not be personally liable for debt incurred by their company while the company was insolvent where:

  • the director started developing a “course of action” that was reasonably likely to lead to a “better outcome” (ie. better than the appointment of an administrator or liquidator) for the company, and
  • the debts were incurred directly or indirectly in connection with the course of action.

The Safe Harbour Provisions only apply from the time the director starts developing a course of action until the earlier of:

  • failure to implement the course of action
  • ceasing the course of action
  • the course of action ceases to be reasonably likely to lead to a better outcome
  • the company appoints an administrator or liquidator

If you would like to discuss the protection afforded by the Safe Harbour Provisions don’t hesitate to contact your client manager.