Retail businesses still face insolvency risks despite new safe harbour laws

New safe harbour legislation which passed through Federal Parliament last week will be unlikely to settle the personal liability fears of current and aspiring company directors in the retail industry, according to a leading insolvency expert.

Currently awaiting royal assent, the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017 amends the Corporations Act 2001 (Cth) and aims to protect directors acting to undertake a company restructure in response to insolvency, where it will receive a better result for stakeholders.

ASIC figures show 155 retail businesses entered external administration in the June 2017 quarter, up 14 per cent on the March 2017 quarter.

According to Rigby Cooke Lawyers partner Demian Walton, the ambiguity of language contained in the new law and the reliance on judges to interpret it will do little to reassure company directors of its protection.

“The legislation fails to give directors specific steps they can take to be assured of protection in attempting to steer a company back to solvency. It is essentially left to judges to determine on a case-by-case basis, and potentially years after the event, whether any company director seeking the protection of this ‘safe harbour’ will actually receive it,” said Mr Walton. 

“It also fails to solve the key issue that company directors will be exposed to personal liability for insolvent trading from the moment they reasonably suspect their company has become unable to pay its debts on time unless they call in the external administrators.

“What may later be found were only temporary cash-flow issues could still be enough to bring down a business, destroying value, costing jobs and leaving creditors (who these laws are meant to protect) unpaid.” 

“Under the new law, directors could potentially only find out years later whether they made it into the ‘safe harbour’, whether they remained in it for long enough, or whether it was really a booby trap,” said Mr Walton.

“A more effective reform would be to give directors a mechanism to obtain legally-binding approval for their reconstruction plan from a registered liquidator at the time of its development and implementation. That way directors can actually know whether they have the protection of the safe harbour and they can be alerted to any adjustments needed for their plan to ensure that protection.”