The Australian government has released draft legislation which proposes significant legislative change to insolvency laws in Australia. One of the changes proposed, is that directors will not be liable for insolvent trading in certain circumstances where the company is undertaking a restructure.

Under the proposed safe harbour reform, directors will not be liable for debts incurred whilst the company is insolvent if they can show that:

  • after suspecting insolvency, the director takes a course of action that is reasonably likely to lead to a better outcome for the company and the company's creditors
  • the debt is incurred in connection with that course of action
  • during the period starting when the action is taken and ending the earliest of:
    1. when the person ceases the course of action
    2. when the course of action is no longer reasonably likely to lead to a better outcome
    3. when the company is placed into external administration under the Corporations Act.

The draft legislation provides non-exhaustive guidance on assessing whether a course of action is reasonably likely to lead to a better outcome. For example, consideration will be had to whether a director has:

  • taken steps to prevent misconduct within the company
  • taken steps to keep appropriate financial records
  • obtained appropriate advice
  • informed themselves of the company's financial position
  • been developing a plan for restructuring the company to improve its financial position.