The end of safe harbour?

Is there a possibility that the new ‘safe harbour’ regime for directors might be removed? It depends.  

While the safe harbour section 588GA of the Corporations Act is not the subject of a sunset provision, such that it will be removed unless re-enacted, the operation of the section must be reviewed in two years.  Section 588HA provides for an independent review of (a) the impact of the availability of the safe harbour to directors of companies on (i) the conduct of directors; and (ii) the interests of creditors and employees of those companies; and (b) any other matters the Minister considers relevant.

The review is to be undertaken by 3 appropriately qualified people who must then give the Minister a written report of the review. That report must be tabled in parliament.

This is not an uncommon approach and compares with the review required, and completed, of the Personal Property Securities Act: see s 343.

Law reform often involves industry raising an issue of the law’s inadequacy, with suggestions for change. Reasons given for the reform vary but are not commonly capable of quantitative evidence, at least in relation to business activity.

Safe harbour reforms have been the subject of many submissions by directors, insolvency practitioners, and general corporate advisers for many years.  The professional or industry bodies of those groups comprise members with extensive knowledge and experience, which has been brought to bear in many submissions to government supporting the change in the law. At the same time, many also opposed or were neutral about the need for the change, or how it was enacted.

In any event, many industry bodies have now have embraced, at least in their marketing, the new law.

The s 588HA review

All of this leads to the fact that we would expect that those bodies and their collective memberships to anticipate the s 588HA review.  They would do this by having monitoring processes in place, however those might be devised, in order to assess the on-going impact of the availability of the safe harbour on the conduct of directors and the interests of creditors and employees of those companies.

As to the conduct of directors, the government would be looking for evidence of directors seeking earlier advice about their company’s position; in fact going back further, for a new wave of better corporate and financial governance to arise that would allow the directors to be able to anticipate indicators of trouble early on.  At a minimum, their record keeping should improve. The directors might be shown to be better at seeking out the appropriate advice, and understanding the navigation required of them. Directors should also show new approaches to recording the progress of their restructure attempt.

Questions of conduct can be addressed by qualitative research of the various memberships; although some aspects here allow a more refined analysis. Are directors waiting until it is too late; what proportion are ineligible under the s 588GA criteria; how is a successful restructure measured anyway; to what extent is voluntary administration used to implement the restructure; and what are liquidators finding when they review the failed attempt, including as to the nature of the advice sought?

Whether there will be court decisions within the two years is problematic; in any event they are less useful for such a review.

As to the impact of safe harbour on the interests of creditors and employees, that is potentially more able to be assessed by quantitative analysis. Have employees, or the government FEG scheme, received a boost in returns; and have employees been more likely to be retained in employment?  To what extent have creditors benefited generally?

This sort of analysis is difficult in dealing with a general population but is made the more achievable by virtue of, for example, the AICD and its director membership; ARITA in respect of its membership of lawyers, bankers and liquidators; and TMA in respect of its turnaround specialists. Quantitative statistical input would be available from ASIC, FEG, and the ATO.

Objective evidence is needed, sometimes difficult to achieve among the various interest groups.  Academics in law and economics therefore have a role.

The end result should be either a confirmation of the usefulness of s 588GA, or its need for amendment; or, perhaps, its repeal.

An ATO comparison

In 2012, the ATO secured a tightening of the law in relation to director penalty notices.  The changes, “and the ATO’s ability to target their application, act to deter company directors from engaging in phoenix activities or using amounts for company or other purposes that should be paid to the Commissioner or superannuation funds”.[1] However, when ATO data was needed to assess the impact of that reform, there were serious limitations as to what was available, described in the October 2015 phoenix report of Melbourne and Monash Universities.[2]

Given the long lead time that the safe harbour laws have had, we should be able to assume that the various government agencies and industry bodies have already assessed the control point of director conduct and creditor and employee returns; and are in the process of laying the groundwork for data to be available from which to then compare the following two years of (hoped for) improvement.

Two years is not long in law reform.

 

[1] Explanatory Memorandum to the Tax Laws Amendment (2011 Measures No 8) Bill 2011 [3.20].

[2] “It would be fair to say that while the regulators and others have been concerned about illegal phoenix activity within companies for at least 20 years, there has been no systematic attempt by anyone to capture reliable data on the incidence, cost, and enforcement of laws tackling illegal phoenix activity”.

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