SESSION 4: Corporate Insolvency - UNSW CLMR...Jagot J of the Federal Court held that it was incumbent on the administrators to make proper enquiries before the resolution to appoint

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SESSION 4: Corporate Insolvency

Current Cases and Regulatory Developments 2016/17

(A/Professor Anil Hargovan, School of Taxation and Business Law, UNSW)

CASES:

Director liability for insolvent trading1

In the matter of Swan Services Pty Ltd (in liquidation) [2016] NSWSC 1724

Liquidator alleged that the former spousal directors of a family company had breached

insolvent trading law under s 588G of the Corporations Act 2001 (Cth).

Court upheld the claim against the director (Mr Swan) but dismissed the claim against his

former wife (Ms Swan) on the basis that the liquidator failed to prove that she acted as a ‘de

facto’ director during the relevant period leading up to the collapse of Swan Services Pty Ltd

and other companies in the group.

Re: Ms Swan (de facto director?)

Justice Black held that Ms Swan did not have significant influence over the operational

aspects of the Swan Group, or the financial terms of its dealing with clients, which were

critical to its activities. Despite Ms Swans position as the Swan Group’s general counsel and

human resources manager, his Honour concluded that her contributions did not reach the

threshold to become a de facto director for the following reasons (at [87]):

… it does not seem to me that the level of [her] influence reached the level … of her making

high level management decisions or acting as de facto director, as distinct from performing

executive-level responsibilities subject to Mr Swan’s ultimate control or …[his] ultimate veto

over any result that he did not accept.

Although documentary evidence did show Ms Swan’s aspirations to take on a wider

leadership role in the companies in the Swan Group, it was found that there were no facts to

support this outcome. On the contrary, despite attempts by Ms Swan to exert a wider role

and influence in the company’s affairs, it was held (at [98]):

Ms Swan in fact had limited ability to make [significant] decisions, and that Mr Swan

retained ultimate control … notwithstanding that he permitted [her] … to assume a

significant level of day-to-day responsibility for dealings with the ATO …

Evidence satisfied the court that Mr Swan was at all times the sole signatory for all of the

Swan Group’s accounts and that, ultimately, all employees were answerable to him and not to

Ms Swan.

Re: Mr Swan (director)

1 Section 588G of the Corporation Act 2001 (Cth) prohibits insolvent trading.

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Court addressed the critical issue of corporate solvency.

His Honour accepted the liquidator’s claim that the companies in the Swan Group failed to

keep proper financial records as required by s 286(1). The facts showed a poor record of tax

compliance and reporting by the companies. Moreover, the companies’ professional advisers

were unable to reconcile the Group’s financial position in the lead up to its liquidation.

These factors triggered the statutory presumption of insolvency in s 588E (4), aiding in the

court’s conclusion that the companies in the Swan Group was insolvent.

His Honour also found, in the alternative with reference to the legal test in s 95A, that the

companies in the Swan Group were insolvent as a matter of fact.

Defences

Court rejected Mr Swan’s defence, under s 588H (2), that he had reasonable grounds to

expect solvency. His claim that companies in the Swan Group were paying their debts in

accordance with invoice terms was held to be inconsistent with the objective evidence of

multiple demands from creditors and the renegotiation of contracts.

Mr Swan also relied on the defence under s 588H(3) that he had reasonable grounds to

believe that competent and reliable people were responsible for providing adequate

information about whether the companies in the Swan Group were solvent.

Although the court was satisfied that the professional advisers relied upon were competent

and reliable, the defence was rejected due to the failure to establish the second element of this

defence – namely, that such people were responsible for providing Mr Swan with adequate

information on solvency. It was held that the information provided to Mr Swan by the

professional advisers did not provide a reasonable basis to conclude that the companies were

solvent.

Judicial Relief

Mr Swan’s application for judicial relief from liability under s 1317S was also rejected by the

court despite the acceptance that Mr Swan acted honestly. The court was not satisfied that

Mr Swan ought fairly to be excused from liability, either wholly or partly, for the following

reasons (at [240]):

… the evidence … does not indicate that Mr Swan closely engaged [with solvency

issues] … or that he permitted [the companies] to continue to trade and incur debts

only following any careful consideration of the risk posed to creditors … at best, he

had a hope that [the companies] could trade through their difficulties …

Determining compensation payable

In assessing the loss and damage caused to the companies, the court took into account prior

recovery action by the liquidation – here, the liquidator had successfully recovered $2.5

million from the ATO as an unfair preference payment in earlier litigation. Significantly, the

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approximately $11 million compensation payable by Mr Swan under s 588M was reduced by

the amount recovered from the ATO.

Key Points

Case is a reminder that statutory liability for insolvent trading is not imposed upon

company officers as distinct from company director

The net for potential liability under insolvent trading law is, nonetheless, cast wide

and can include de facto directors

A family member who becomes involved in a company’s management is to be treated

no differently from any other person when assessing whether a de facto director or

not.

Invalid administrator appointments2

Granger v ACN 165 098 617 Pty Ltd [2016] FCA 474; BC200406389

The company’s constitution required a valid resolution to be passed by two directors. The

resolution appointing the administrators was passed by a single director, as the other director

was overseas and, allegedly, unreachable according to the single director. The administrators

search of the records maintained by ASIC confirmed that the company had two directors.

Despite the awareness of their improper appointment, the administrators made a judgment

call that continuation of the administration was in the best interests of the company.

Shortly thereafter, the administrators were contacted by the absentee director for an

explanation as to why they were appointed.

The administrators sought orders to validate their appointment, pursuant to Part 5.3A of the

Corporations Act 2001 (Cth), and that all costs of the application are paid out of the assets of

the company. The directors did not object to the former order, but did object to the latter

order.

Jagot J of the Federal Court held that it was incumbent on the administrators to make proper

enquiries before the resolution to appoint them was passed and before acting on their

appointment.

In her decision, Justice Jagot stated that:

The administrators did have a duty to ensure that their appointment was valid. It is also clear

that it was not a mere oversight by the administrators to proceed with the administration in

the circumstances …. The inescapable inference is that the administrators were aware at the

time of the appointment that there were two directors of the company and that in all

likelihood a resolution to appoint administrators was required to be approved by the two

directors. They obtained a copy of the company’s constitution immediately after the

2 Section 436A of the Corporations Act 2001 (Cth) provides for the appointment of an administrator if the board

has resolved to the effect that the company is insolvent, or likely to become insolvent as some future time. See

further, Mark Wilks and James Lucek-Rowley (Corrs Chambers Westgarth), ‘Invalid administrator

appointments’ (2017) 18(1) Insolvency Law Bulletin 7.

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resolution purporting to appoint them, which indicates that they could have obtained a copy

of that constitution immediately before appointment. Further, it is apparent from [the

Administrator’s] affidavit that he knew that Mr Seaman was overseas and, I infer, must have

been provided with Mr Seaman’s contact details because the administrators made contact

with Mr Seaman the very next day by way of email. While there was some delay in response

by Mr Seaman between 1 and 4 April 2016, it is difficult to accept from the evidence that

there was such a degree of urgency that Mr Seaman could not have been contacted before the

appointment.

…

Ultimately, I have reached the view that the administrators should not have their costs of this

application paid out of the assets of the company … it was necessary and appropriate that the

administrators make the effort to obtain Mr Seaman’s consent to the appointment before

proceeding with the administration in circumstances where they must have had Mr Seaman’s

contact details and were able to contact him almost immediately after the meeting. Further,

the administrators must be taken to have known at the time of their appointment that the

appointment was invalid. They could and should have found out from the company’s

constitution, which they managed to obtain one day after the appointment, that a resolution to

appoint administrators had to be approved by both directors and they could and should have

contacted Mr Seaman to obtain his consent before the appointment was purported to be

effected. That is, they should not have simply accepted at face value any information from

Ms Taratoris about difficulty in contacting Mr Seaman.

Orders were made confirming the appointment, pursuant to s 447A, but the costs of the

application were borne by the administrators themselves and could not be paid out of the

assets of the company – for the reasons above.

Key Points:

Administrators should make full and proper enquiries prior to their appointment

Failure to give proper consideration to the validity of an appointment can have serious

costs consequences.

Re Condor Blanco Mines Ltd [2016] NSWSC 1196; BC201607321

The appointment of the administrator of Condor Blanco Mines Ltd was successfully

challenged on the basis that, at the time of appointment, the board of the Company

(consisting of two directors, Darby and Stops) did not genuinely hold the belief that the

Company was insolvent or about to become insolvent.

Barrett AJA held [at 82] that the evidence made it clear that:

Mr Stops [the director] never inquired about Condor’s financial state or addressed his mind

independently to the question whether Condor was insolvent or likely to become insolvent at

some future time. He says that he always relied on [the other director] regarding the

financial position and solvency. But there is not the slightest indication … that Mr Stops ever

formed any opinion about the capacity of Condor to pay its debts as and when they fell due.

… It was not open to Mr Stops simply to take at face value and unquestioningly the terse

opinion communicated by [the other director].

He had a responsibility to think and assess for himself and, for the purpose of doing so, to

familiarize himself with relevant financial facts (see Australian Securities and Investments

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Commission v Healey [2011] FCA 717; 278 ALR 618 at [14]- [22]). In discharging that

responsibility, Mr Stops might have been assisted by guidance and explanation given by [the

other director] … whose familiarity with the company’s affairs gained over a substantial

period was obviously greater than whatever Mr Stops, acting alone, could have gleaned in six

days. But he still needed to form an opinion of his own. He did not do so.

Barrett AJA concluded that the director did not hold a genuine opinion, formed in good faith,

that Condor was insolvent or likely to become insolvent at some future time. To that extent,

the statutory pre-condition to appointment of an administrator prescribed by s 436A (1) (a)

was not satisfied.

Obiter finding that the director appointed the administrator for an improper purpose (at

[114]):

In this case, Mr Darby was motivated by an improper purpose of negativing the power and

influence of the incoming directors and defeating the will of the members who were about to

put those directors into office. Mr Stops simply followed blindly and unquestioningly in Mr

Darby’s footsteps, so that his participation was tainted by the same improper purpose. But for

that purpose of Mr Darby in which Mr Stops cooperated, the appointment under Part 5.3A

effected at 6.00 pm on 4 July 2016 would not have been made.

Expressed judicial disagreement on role of administrator when accepting appointment (at

[140]) – is there a ‘duty to enquire’?:

I intend to indicate an opinion that, in general, it is not part of the administrator’s

responsibility, in assessing the validity of his or her appointment, to delve into any purpose or

motive of the directors beyond that of resort to Part 5.3A administration as a response to

actual or impending insolvency. Any suggestion to the contrary that there may be in

Australian Securities and Investment Commission v Planet Platinum Ltd [2016] VSC 120;

112 ACSR 570 (at [23]-[24]) should, in my respectful opinion, not be accepted. It was said in

that case that “the actual purpose of the appointment” is “an important factor” for the

administrator to take into account in discharging his or her responsibility to assess the

validity of the appointing resolution.

If not, what is an administrator expected to do upon appointment? According to Barrett AJA

in Blanco (at 142)]

if it were as plain as a pikestaff, without any form of inquiry, that directors were resorting to

administration for an extraneous purpose (because, for example, they actually said so or

immediately obvious and observable circumstances left no alternative explanation), the

practitioner asked to accept appointment would fail to discharge the relevant responsibility

by accepting. Beyond any such patently obvious case, however, there can be no expectation

that the responsibility at the time of appointment extends to considering possibilities of

improper purpose and abuse of process.

Obiter remarks on implications of company’s failure to comply with s 201A (2) [public

company must have at least 3 directors] and its impact on the appointing resolution (at [102]):

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my conclusion would have been that the circumstance that, at the time of the purported board

resolution of 4 July 2016, Condor had only two directors did not affect the validity of a board

resolution otherwise valid. The basis for this conclusion would have been that the reference in

s 436A(1) to a company’s “board” extends to a board the composition of which does not

accord with s 201A, provided that the constitution allows a board so constituted to function.

That being so, there is no need to address [the administrator’s] application for a curative

order to overcome the perceived s 201A problem.

Key Points

Decision reinforces the courts will be vigilant against abuse of s 436A

Offers passing guidance on what is the legal test to ascertain whether an administrator

is appointed for an improper purpose

Open question as to whether the administrator’s ‘duty to enquire’ is a narrow or broad

duty? Conflicting cases.

Addresses ramifications of non-compliance with s 201A(2) and its implications for a

resolution to appoint an administrator

Liquidator’s remuneration3

There is no universal approach applicable in all circumstances by which the “reasonableness”

of remuneration claimed or expenses incurred should be measured: Davies J in Thackray v

Gunns Plantations Ltd (2011) 8 ACSR 144; [2011] VSC 380 (at [64]).

Competing approaches to remuneration:

Time based remuneration

Application of fixed rates

Question of proportionality –involves comparison of the claim to

remuneration with the benefit or gain to be obtained.

Tension long recognised in case law – see, for example, Finkelstein J in Re Stockford Ltd;

Korda (2004) 140 FCR 424; [2004] FCA 1682 (at [40]):

It seems to me that some balance must be struck between two opposing views. The balance

must achieve some moderation in fees to protect the fund so that creditors can achieve the

largest possible return, but not be so moderate as to discourage competent practitioners from

providing their important services.

3 A liquidator is entitled to reasonable remuneration for his or her services and bears the onus of establishing

that the remuneration claim is fair and reasonable with reference to the factors specified in ss 473(10) and

504(2) of the Corporations Act 2001 (Cth). See also Principles 10-12 of the Code of Professional Practice for

Insolvency Practitioners (ARITA, 3rd

, 2014). For discussion, see Justice Ashley Black, Three Recent

Developments in Insolvency Law (Corporations Law Conference August 2016), Supreme Court of New South

Wales

http://www.supremecourt.justice.nsw.gov.au/Documents/Publications/Speeches/2016%20Speeches/Black_2016

0800.pdf

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Tension has resurfaced recently in line of recent authorities in New South Wales Supreme

Court. Justice Brereton has been critical of remuneration by hourly rates and, in a series of

judgments, reduced remuneration claims by relying upon the ad valorem approach to

remuneration – the latter approach involving grounds of proportionality and value of the

services provided.4

In Re Independent Contractor Services (Aust) Pty Ltd (in liq) (No 2) [2016] NSWSC 1065

there were recoveries of $211,000 and expenses of $80,000 leaving a residue of $130,000.

The liquidator claimed remuneration of $49,510. The liquidators were allowed $30,000,

which represented roughly 14% of recoveries or 30% of the fund available for remuneration

and distributions.

The justification for this approach is provided in both judicial passages below.

Re Independent Contractor Services (Aust) Pty Ltd (in liq) (No 2) [2016] NSWSC

106

Remuneration may be by way of commission on assets realised and/or assets distributed, or

time-based. Liquidators will not necessarily be allowed remuneration at their firm's standard

hourly rates for time spent. Particularly in smaller liquidations, questions of proportionality,

value and risk loom large. In smaller liquidations, liquidators cannot expect to be rewarded

for their time at the same hourly rate as might be justifiable where more property is available.

As I endeavoured to explain in AAA Financial Intelligence Ltd (No 2):

The liquidator’s remuneration claim is based on his firm’s quoted standard hourly rates. However,

what is reasonable remuneration cannot be assessed solely by the application of a liquidator's quoted

standard hourly rates to the time reasonably spent. Although virtually every application for

remuneration that the Court sees is made on that basis, regardless of the amount of property involved,

the application of a standard hourly rate to liquidations of diverse size and complexity cannot reflect

some of the factors referred to in s 504(2), and in particular (d) the quality of the work performed, (g)

the degree of risk and responsibility involved, and, above all, (h) the value and nature of the property

involved. It does not reward liquidators for value, but indemnifies them against costs. It disregards

considerations of proportionality. Thus it is wrong to assess "reasonable remuneration" by reference

only to time reasonably spent at standard rates, which though a relevant consideration is only one of

several, and should not be regarded as the default position or dominant factor, and is to be

considered in the context of other factors, including the risk assumed, the value generated, and

proportionality.

Re Sakr Nominees Pty Ltd [2016] NSWSC 709

Justice Brereton explained why ad valorem approach to remuneration is desirable, despite

its shortcomings, compared to time-based remuneration.

4 Proportionality was also emphasised by the Full Court of the Federal Court in Templeton v ASIC (2015) 108

ACSR 54; [2015] FCAFC 137. 5 This case is also noteworthy for holding that the decision found that the statutory order of priority in

section 556 of the Corporations Act does not apply in respect of trust assets. For critical analysis of this aspect

of the decision, see Dr Garry Hamilton (Minter Ellison), ‘Winding up insolvent corporate trustees – what

happened to the liquidator?’(2016) 17(6) Insolvency Law Bulletin 103; Richard Rowley, Giles Woodgate and

Phillip Stern, ‘Further implications arising from the Independent Contractor Services decision’ (2016) 17(6)

Insolvency Law Bulletin 107.

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While not without its shortcomings, ad valorem remuneration is inherently proportionate, and

incentivises the creation of value rather than the disproportionate expenditure of time.

Remuneration on an ad valorem basis was once conventional, and is plainly still

contemplated by the relevant statutory provisions, despite the relatively recent prevalence of

time-based remuneration. In particular, Corporations Act s 473(3) provides, in respect of a

court-appointed liquidator, that a liquidator is entitled to receive remuneration "by way of

percentage or otherwise" (emphasis added).

Note: Re Sakr Nominees Pty Ltd, New South Wales Court of Appeal,6 Bathurst CJ, Beazley

P, Gleeson JA, Barrett and J Beach AJJA, heard in November 2016, judgment reserved.

More recently, Justice Brereton suggested in Re Dungowan Manly Pty Ltd [2016] NSWSC

1346 that while lower fees should be charged for smaller administrations, larger fees (or top

up amounts) may be claimed for successful recoveries. His Honour stated that (at [16]):

… it would be different if their investigations produced a further levy and recoveries, or if

they had taken a less cautious and higher risk approach which would have attracted a

premium for risk and results. On an application for further remuneration, that could still be

the case, and by reserving leave to apply for additional remuneration the possibility for that

outcome is preserved. By that I mean that an application for further remuneration would not

be limited to the period after the present order is made or the period in respect of which

remuneration was initially claimed. In other words, a premium in respect of work already

done and remunerated can be justified in the future, if it turns out to have been productive.

See Clout in his capacity as Liquidator of Mainz Developments Pty Ltd (in liquidation)

[2016] NSWSC 1146 for a useful review of recent case law on the manner in which

remuneration was determined.

Significantly, Robb J (at [131]) in Mainz rejected the proposition put by the creditor, based

upon the reasoning of Brereton J in the Independent Contractor Services Case, that the court

should choose 2% as the appropriate percentage for assets realised when determining the

liquidator’s remuneration:

It is not correct to say that the process by which the court determines the amount of

remuneration to be allowed to liquidators has evolved to the point where the determination

involves the selection of a percentage, divorced from all of the other relevant circumstances

of the winding up.

Mainz is a useful reminder that there are no hard and fast rules when determining

remuneration issues.

6 All of the following judgments by Justice Brereton were reviewed by the New South Wales Court of Appeal:

In the matter of AAA Financial Intelligence Ltd (in liquidation) ACN 093 616 445 (No 2) [2014] NSWSC 1270

where there were recoveries of $180,000 and a residue for distribution before remuneration of $100,000. The

liquidators were allowed 20% of the recoveries which was $36,000, representing 36% of the fund remaining

available for distribution and remuneration; In the matter of Gramarkerr Pty Limited (No 2) [2014] NSWSC

1405; In the matter of Hellion Protection Pty Ltd (In Liquidation) [2014] NSWSC 1299.

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LEGISLATION AND PROPOSED LEGISLATION

Insolvency Law Reform Act 2016 (Cth)7

Parliament passed the Insolvency Law Reform Act 2016 (ILRA) on 22 February 2016,

receiving royal assent on 29 February 2016.

First stage of the reforms commenced on 1 March 2017, with the second and final stage due

to commence on 1 September 2017.

The ILRA amends:

Bankruptcy Act 1966 (Cth)

Corporations Act 2001 (Cth)

The ILRA introduced common rules in relation to the regulation, discipline and the

registration of corporate and personal insolvency practitioners – done via the introduction of

the Insolvency Practice Schedule that will be included into both Acts and the creation of the

Insolvency Practice Rules (bankruptcy) and Insolvency Practice Rules (corporations).

Major part of the law reform is the Insolvency Practice Schedule (Corporations), inserted as

Schedule 2 into the Corporations Act 2001 (Cth)

Note: Part 1, 2 and 4 of the provisions in the Insolvency Practice Schedule

(Corporations) commenced on 1 March 2017.

Part 1 deals with:

Part 1 Division 1 (Introduction); Division 5 (Definitions)

Part 2 deals with:

Part 2 Division 10 (Introduction); Division 15 (Register of liquidators/trustees);

Division 20 (Registering liquidators/trustees); Division 25 (Insurance); Division 30

(Annual liquidator/trustee returns); Division 35 (Notice requirements); Division 40

(Disciplinary and other action);8 Division 45 (Court oversight); Division 50

(Committees under Pt 2)

7 EM to Exposure Draft identifies purpose of amendments as including removing unnecessary costs and

increasing efficiency in insolvency administrations, aligning and modernising the registration and disciplinary

frameworks applicable to registered liquidators and registered trustees in bankruptcy, promoting market

competition on price and quality and improving overall confidence in the professionalism and competence of

insolvency practitioners.

8 For critical analysis on the mandatory 10 year disqualification for insolvency practitioners whose registration

is cancelled under the new disciplinary proceedings, see David Castle (Former Chair of the CALDB),

‘Insolvency Law Reform – the 10 year ban’ (2016) 17(7) Insolvency Law Bulletin 127; ‘Insolvency law Reform

– resignation versus cancellation’ (2016) 17(5) Insolvency Law Bulletin 73.

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See Further: ASIC RG 258: Registered liquidators: Registration, disciplinary actions and

insurance requirements (March 2017)

Part 4 deals with a variety of matters:

(a) an external administrator of a company may assign a right to sue; and

(b) forms approved by ASIC; and

(c) Ministerial power to make rules (Insolvency Practice Rules).

NOTE: Part 3 of the provisions in the Insolvency Practice Schedule (Corporations) is

due to commence on 1 September 2017:

Part 3 sets out requirements for conducting the external administration of a company.

Main provisions deal with:

(a) remuneration of the external administrator; and

(b) duties of the external administrator in handling the money and other property of the

company; and

(c) conflicts of interest; and

(d) duties of the external administrator to keep appropriate records, to report to ASIC and to

give information, documents and reports to creditors, members of the company and others;

and

(e) creditor and company meetings; and

(f) the creation and conduct of a committee to monitor the external administration (called a

committee of inspection); and

(g) the rights of creditors to review the external administration; and

(h) the rights of creditors to remove the external administrator and appoint another; and

(i) the review of the external administration by the Court.

Other Pending Insolvency Law Reforms

The adverse impact of Australia’s insolvent trading laws9 on attempts at informal corporate

rescue, outside of formal administration,10

continues to attract the attention of the Federal

Government. Following an aborted attempt by Treasury to address this issue during the

global financial crisis in 2010,11

recent initiatives at law reform in 2016 has once again turned

the spotlight on the need to do more to encourage and facilitate the restructure of

economically viable companies.12

9 Section 588G of the Corporations Act 2001 (Cth).

10 Part 5.3A of the Corporations Act 2001 (Cth).

11 See further, Treasury Discussion Paper (January 2010), Insolvent Trading: A Safe Harbour for

Reorganisation Attempts Outside of External Administration. For discussion, see Jason Harris, ‘Director

Liability for Insolvent Trading: Is the Cure Worse than the Disease?’ (2009) 23 Australian Journal of Corporate

Law 266; Anil Hargovan, 'Director's Liability for Insolvent Trading, Statutory Forgiveness and Law Reform'

(2010) 18 Insolvency Law Journal 96.

12 Australian Government, Improving bankruptcy and insolvency laws Proposals Paper (April 2016)

[www.innovation.gov.au].

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The impetus for law reform, on this occasion, can be attributed to the overarching goal of the

government to drive efficiency and economic growth in the Australian economy.13

In April 2016, Treasury proposed 3 changes to improve bankruptcy and insolvency law –

namely:14

(1) reduce current default bankruptcy period from three years to one year

(2) introducing a 'safe harbour' for directors from personal liability for insolvent trading if

they appoint a restructuring adviser to develop a turnaround plan for the company, and

(3) making ‘ipso facto’ clauses unenforceable if a company is undertaking a restructure.

Public submissions closed on 27 May 2016. The Government is yet to announce its position

on the law reform options canvassed in its Proposals Paper.

The alternate models for law reform to promote a restructuring culture - either a safe harbour

defence (model A) or a carve-out (model B) for directors in respect of the insolvent trading

provision in s 588G of the Corporations Act - are reproduced below.15

Safe Harbour Defence (Model A)

This defence will be available if a reasonable director has an expectation based on advice by

an appropriately experienced, qualified and informed restructuring adviser, that the company

can be returned to solvency within a reasonable period of time, and the director is taking

reasonable steps to ensure it does.

For this defence to apply, the company must appoint a restructuring adviser who:16

(a) is provided with appropriate books and records within a reasonable period of their

appointment; and

(b) is and remains of the opinion that the company can avoid liquidation and is likely

to be able to be returned to solvency within a reasonable period of time; and

(c) is required to exercise their powers and discharge their duties in good faith in the

best interests of the company and to inform ASIC of any misconduct they identify.

13

Productivity Commission 2015, Business Set-Up, Transfer and Closure Final Report 75, Canberra. The

report was sent to the Federal Government on 30 September 2015 but publicly released on 7 December 2015.

For discussion, see, Jason Harris and Anil Hargovan, 'Productivity Commission Safe Harbour Proposal for

Insolvent Trading' (2016) 68 Governance Direction 9.

14 Australian Government, Improving bankruptcy and insolvency laws Proposals Paper (April 2016)

[www.innovation.gov.au]. 15

For critical analysis of the law reform proposals, see Jason Harris, ‘Reforming insolvent trading to encourage

restructuring: safe harbour or sleepy hollows?’ (2016) 27(4) Journal of Banking and Finance Law and Practice

294; Anil Hargovan, ‘Corporate Governance in Financially Troubled Companies: Australian Law Reform

Proposals’ (2016) 4 Company and Securities Law Journal 483. 16

Australian Government, Improving bankruptcy and insolvency laws Proposals Paper (April 2016) 11.

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It is proposed that the restructuring adviser would be:17

appointed by the company, not the directors, and thus they owe any duties to the

company;

not be civilly liable to third parties for an erroneous opinion provided that it was

honestly and reasonably held;

unable to be appointed in any subsequent insolvency without the leave of the Court;

and

specifically carved out of the expanded definition of director (ie. would not be a

shadow or de facto director).

Statutory Carve Out (Model B)

This model seeks to provide directors who are acting in the best interests of the company and

its creditors as a whole with a safe harbour within which they may attempt to return the

company to profitability. It does so by modifying the current operation of s 588G of the

Corporation Act in the following way. Section 588G will no longer be applicable if:18

(a) the debt was incurred as part of reasonable steps to maintain or return the company

to solvency within a reasonable period of time; and

(b) the person held an honest and reasonable belief that incurring the debt was in the

best interests of the company and its creditors as a whole; and

(c) incurring the debt does not materially increase the risk of serious loss to creditors.

Model B contemplates the safe harbour as a carve out, rather than a defence. Thus, the

Proposal Paper suggests that the burden of proof would lie on the liquidator to establish the

director had breached any one of the three limbs of this proposal.19

Indicia of both ‘reasonable steps’ and ‘reasonable time’ are intended to be included in the

Explanatory Memorandum accompanying the legislation.20

17

Australian Government, Improving bankruptcy and insolvency laws Proposals Paper (April 2016) 13. 18

Australian Government, Improving bankruptcy and insolvency laws Proposals Paper (April 2016) 15. 19

Australian Government, Improving bankruptcy and insolvency laws Proposals Paper (April 2016) 15. 20

Australian Government, Improving bankruptcy and insolvency laws Proposals Paper (April 2016) 16.