Question

What was the reason behind the recent introduction of CA s 588GA? Explain your answer with reference to CA s 588G.

Answer 1

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Section 588GA of the Corporations Act 2001 (Cth) quotes a ’Safe Harbor’ from civil insolvent trading provisions at the time during which a company is looking to restructure or turnaround its financial position.

The Safe Harbor provision looked into the following aspects which were essential to mitigate economic losses for the company and individuals tied to it. It came under the following conditions:-

(a) after a director suspects insolvency;

(b) the director begins to develop one or more courses of action that are quite likely to lead to a better outcome for the company; and

(c) the debt is incurred directly or indirectly in association with such course of action starting when they pick up that course of action and ending at the earliest of:

(i) the director failing to take steps to cause the proposed course of action into effect within a reasonable time frame; or

(ii) the director stopping to take any such course of action; or

(iii) when the course of action is unlikely to lead to a better outcome for the company; or

(iv) the selection of an administrator or liquidator is made to the company.

A ‘better outcome’ in turn means that an outcome better for the company than the immediate appointment of an administrator or liquidator of the company.

The plan developed by the director doesn't necessarily need to succeed to attract the Safe Harbor protection, however, it will still apply to debts accumulated by a director during that period as long as the course of action was still on its way to lead to a better outcome at the time the decision is made.