The legislation addresses the problems for directors that arise when they learn about their company’s financial difficulties. The reforms provide a period of “breathing space”. During this time, directors will, with the assistance of professional external advisers, be able to work through a plan or plans for the turnaround of the company. The breathing space is not “carte blanche”. As outlined below, to benefit from the safe harbour laws, directors will need to comply even more rigorously with some requirements than would be the case for a solvent company. Such requirements may include the lodgement of Activity Statements and adherence to principles of proper corporate governance.
It is hoped that the legislation will allow both directors, and equally as importantly, those who are advising and funding them (be they bankers, “angel investors” or shareholders), to respond responsibly but assertively to a company’s difficulties, instead of reaching for immediate means of limiting the directors’ liability.
The stated reasons for the reform are reflected in the following comments made by those close to the policy:
- “This will drive cultural change amongst directors by encouraging them to keep control of their company, engage early with possible insolvency and take reasonable risks to facilitate the company’s recovery instead of placing the company prematurely into voluntary administration or liquidation.”
- “… [T]hese amendments will reduce instances of a company proceeding to a formal insolvency process prematurely and where companies do enter into a particular formal insolvency procedures, they will have a better chance of being turned around or of preserving value for creditors and shareholders.”
- “This in turn will promote the preservation of enterprise value for companies, their employees and creditors, reduce the stigma of failure associated with insolvency and encourage a culture of entrepreneurship and innovation”
To those comments, we add:
there is clearly a belief among many participants in business that there needs to be a re-balancing of risk. Our laws have, at least on their face of it, aimed to provide strong protection for creditors. In seeking to do so, they may paradoxically have resulted in greater losses for creditors and exposed others to the consequences of corporate insolvency.
The effect of the safe harbour reforms is to rebalance the risk of a distressed company continuing to trade. These changes not only support the interests of the company, they are good for its creditors and all other stakeholders. This compares to the previous legal regime, which mainly favoured the needs of creditors.