Directors’ liability for insolvent trading

The Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017 has been passed by the Commonwealth Parliament and is awaiting Royal Assent. The Bill amends the Corporations Act 2001 (Cth) to introduce a “safe harbour” for company directors from personal civil liability for insolvent trading. Background.

UPDATE: Royal Assent was given on 18 September 2017 and the safe harbour laws commenced operation on 19 September 2017.

Under the safe harbour, directors will only be liable for debts incurred while the company was insolvent where it can be shown that they were not developing or taking a course of action that at the time was reasonably likely to lead to a “better outcome” for the company than proceeding to immediate administration or liquidation.

The Bill also introduces a stay provision which affects the enforceability of “ipso facto” clauses during an administration or scheme of arrangement.

An “ipso facto” clause is a provision that allows one party to terminate or modify the operation of a contract upon the occurrence of some specific event, regardless of otherwise continued performance of the counterparty. The operation of these clauses can reduce the scope for a successful restructure or prevent the sale of the business as a going concern.

Courts will have a discretion to allow or prevent  the enforcement of express rights that amend or terminate a contract because of the appointment of an administrator, presence of a managing controller over all or the substantial portion of a corporation’s property or because an entity is subject to a compromise or arrangement.

The safe harbour laws will commence operation the day after the Bill receives Royal Assent, with the ipso facto provisions set to commence by 1 July 2018.

The impact of the safe harbour will be independently reviewed in two years.

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