Michael.1
Insolvency and related law and policy, and more

Michael Murray is an Australian author and commentator on corporate and personal insolvency law and related issues, in Australia and internationally. He has a strong law and policy background, is independent of any connections, and his views are his own. He gives no legal advice. 

Review of Australia’s safe harbour protection from insolvent trading – remember s 588HA [updated]

The federal government has finally made arrangements to have Australia’s “safe harbour” from insolvent trading law reviewed – s 588GA, introduced in September 2017.  But the review must be wider than the media release issued?

The minister’s media release?

The minister’s media people have him say that the panel will be required to

“determine if the safe harbour remains a fit for purpose tool to support companies to restructure and survive”.

That presupposes it was fit for purpose to start with, which it may have been, but the review should not be limited by that.

The terms of the review are dictated by the law – section 588HA, as to the impact of the availability of the safe harbour to directors of companies on the conduct of those directors, and the interests of creditors and employees of those companies, and any other matters the Minister considers relevant.

Despite the economic impact of COVID-19 that has arisen since s 588HA was introduced in 2017, the Minister does not consider any other matters are relevant for the panel, again, however, only according to his media advisers.  One might have thought the need to introduce other safe harbour defences to supplement s 588GA – s 588GAAA, s 588GAAB, and s 588GAAC, supplemented by s 588GB, all since 2020 – might have been ‘relevant’ for the panel to consider.

The review panel is to be chaired by Ms Genevieve Sexton BA LLB with Ms Leanne Chesser B Com and Mr Stephen Parbery also appointed, who each must be assumed to have “appropriate qualifications” to undertake the review: s 588HA(2). The review is to take 3 months.

By way of background, section 588HA of the Corporations Act in fact required this review to be held as soon as practicable after 2 years, say 2019: see Is Australia’s insolvency safe harbour protection working – who knows? | Murrays Legal Commentary

National Innovation and Science Agenda 2015

Safe harbour was part of the government’s National Innovation and Science Agenda (NISA), announced in December 2015, one aspect of which was to create ‘a safe harbour for company directors from personal liability for insolvent trading [under s 588G] if the company is genuinely attempting to restructure’ and to ‘provide as many businesses as possible the opportunity to [effect a] turnaround, restructure and survive’, as long as they are corporate businesses.

Protection from liability for insolvent trading under s 588G was a long time coming in Australia, following ten years of deliberations, and once introduced, further deliberations are now occurring.  In The end of safe harbour? | Murrays Legal Commentary in December 2017, I suggested that processes for monitoring the impact of the new section 588GA be put in place then, at the time of its commencement, but in retrospect that was never going to happen, including from the industry bodies. However, no doubt since then data has been gathered in accord with the government’s regulatory review standards in support of this review.

Section 588G

The safe harbour seeks to strike a balance between unfairness to creditors of insolvent trading and retention of what might be a viable business.  Although the relevant minister has referred to a review of the safe harbour protection, that can’t be looked at separately from s 588G itself, and its usefulness, or otherwise. That has not been the subject of a formal review. But a very useful and timely analysis of the duties of directors across jurisdictions, including Australia, is given by Professor Aurelio Gurrea-Martínez – Towards an optimal model of directors’ duties in the zone of insolvency: an economic and comparative approach.[1]

There are also several objective and rigorous academic analyses of s 588G that are available to the panel.

Section 588GA

As to s 588GA, criteria for its success or value are difficult to define.  Cases before the courts are not an indicator, in fact there have been no useful decisions on a genuine attempt at restructure that has ended in liquidation, and the conduct of the advisers and directors have come under scrutiny.[2]  The premature entry into insolvency is also undefined, or indefinable, as is its prevention. Any surveys used would need to be rigorous, because of the wide range of different and competing interests.

Given the purpose of s 588G, and s 588GA, in influencing director behaviour, the review may need to look beyond mere law and accounting into behavioural sciences and the like, given the rather remote threat of s 588G and its unlikely influence on many directors, particularly in the SME sector, where the vast bulk of insolvencies occur.  However, personal liability and bankruptcy for 3 years may represent a deterrent for those directors, with the government apparently holding back on the 2015 NISA proposal to reduce that to 1 year.  Nevertheless, there are numerous other personal liabilities that will operate in that sector.

Also relevant are the motivations of liquidators in pursuing s 588G claims, given the limited funds generally in most insolvencies, for remuneration, let alone creditors,[3] and particularly in the current environment of limited insolvency work.[4] This might be relevant in assessing the impact of s 588GA in allowing directors to better resist liquidators’ s 588G demands for funds.

Comparative laws

Overseas experience is also useful, as outlined in Professor Gurrea-Martínez’ paper.  Also, a 2015 English study had compared Australia’s insolvent trading regime with that of the UK, finding it ‘remarkable’ that s 588G ‘appears to have been no more effective over its near 50 year history than section 214 [wrongful trading] has been in its 27 years’. That goes to the question why s 588GA was introduced in the first place.  The article also explains that while insolvent trading raised issues in the public interest, leaving those claims to liquidators with creditors’ interests only in focus was not producing a sufficient process of enforcing insolvent trading laws, such that the law was changed to allow the regulator to bring proceedings, rather than the liquidators.  Does insolvent trading work? The UK may not think so. | Murrays Legal Commentary

More

In other respects, some other coverage of the issues are found here: 588GA | Murrays Legal Commentary

Final report due November 2021

No doubt the review panel will produce a useful report.

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[1] (2021) Journal of Corporate Law Studies, DOI: 10.1080/14735970.2021.1943934

[2] The limits of safe harbour protection (2021) 21(3&4) INSLB 36, Jason Harris

[3] The roles of the state and the private profession in the insolvency system: do we have the right balance? Michael Murray & Jason Harris, 4 August 2021 Australian Academy of Law – Sydney Insolvency Roundtable.

[4] See ARITA to ASIC – Feedback on draft Cost Recovery Implementation Statement: ASIC industry funding model (2020-21) (CRIS), 12 August 2021

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