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The provision of Safe Harbor implies to a special rule whereby certain conducts will be deemed not to violate a said rule (Eales, n.d.). It has been implemented by different legal writers and scholars at different span of time, that the provision of safe harbors is nothing but a scope of reducing the qualm that is formed by setting an indefinite standard. Another benefit as pointed out by scholars is that it helps in avoiding the formulation of precise rules that leaves no option in the hand of the judges to apply their discretionary power as to tough cases (Hannigan, n.d.). The provision of safe harbor basically is a combination of the uncertain vague standards with precise rules that helps the legislation to identify the certainty of the advance outcome of foreseeable cases, thereby making it easier for the judges to decide upon the other remaining cases.
In the opinion of an advisor, he states that the introduction of provision of safe harbor relating to the directors of the company, in matters of insolvency, will encourage the businesses to restructure, thereby in addition saving jobs and atleast $4billion of the economy per year (Hartley, 2011). Yet the stakeholders and the shareholders of the company are of the opinion that the introduction of the provision of safe harbors would be an open invitation for the companies to face financial crisis, in addition to that the companies would enroll their names under the group of “Zombie Companies”. This is because it will permit the companies to extend their respective time span till an uncertain period, when it is supposed to be “dead” as a separate entity (James, Ramsay and Siva, n.d.).
It has been held repeatedly that directors should be well aware of their financial liabilities and especially about their manifestation involving their liabilities concerning insolvent trading under the Corporations Act. A director of a company facing a tough situation is often stuck with a question in his mind as when should the directors state that the financial crisis involving insolvent trade is so huge that it would be a stupidity on the part of directors to take a decision of restructure and save the business. Directors are often of the opinion that they can with their qualification and ability change the future of a business, yet somewhere they are endangered with the provision of insolvent trading laid down by the Corporations Act. Adequate attempts may be prevented by the existing law relating to informal working pattern.
In a discussion released on January 2010, The Federal Minister for Financial Services and Corporate Laws, stated that the effect of Safe Harbor would be applicable if the director’s duty of not to trade although insolvent will be granted if the following conditions are satisfied as stated below:
The Financial System Inquiry recently researched and examined as to how the economy and finance of Australia could be assembled so as to comply with the financial needs and the economic situation of Australia (Lipton, Herzberg and Welsh, 2012). The Financial System Inquiry is taking care now about the efficiency in costing as to the protection of the rights of the creditors, external administration process and also supplying confidence in implementation of credit (Loftus, 2011).
An issue was raised about the Australia’s critical insolvency laws by the Minister of Communication, Malcolm Turnbull on the Australia’s Annual Conference on Management Association. It was held in the month of September 2014. He opined that the current laws needed to be re-formulated. The Murray Inquiry Report concluded in the following way on the issue raised by the Minister of Communications:
The Murray Report clearly stated that the provision of safe harbor is entirely clear on its apart. Now the question arises as to when there shall be an implementation of this provision for the directors of the company in Australia (James, Ramsay and Siva, n.d.). The outsource knowledge that has been gathered in this regard is that it will be requiring the quite a long time to implement the provision of the safe harbor on to the directors (Morrison, 2002). Till the bill is being passed and it is being enforced the directors will be held liable for the insolvent trading and henceforth care should be taken in that regards.
A report drafted states that if any director is found to trade while the company is declared insolvent, the current laws may penalize and disqualify such a person as being the managing director (Lingaitis, Dailydka and Gnenny, 2013). The current laws may also require the directors to pay the debt that has been incurred while the company was trading insolvent. It is quite a well built issue that law often requires the company to go for external administration before preferring the option of restructuring it (Sealy, 1989).
The main purpose of implementing the provision of Safe Harbor is to satisfy the directors that there is no force being applied on them, where they are left with no alternative options in their hand. It is basically an opportunity provided by the law to the directors of the company which suffer from financial crisis to rethink the administrative control of the business and restructure it in accordance to the requirements laid forward (Stiglingh and Silke, 2010).
Like any other topic, this particular issue also has certain good aspects as well as bad aspects. The introduction of the provision of safe harbor on the directors will be having certain obligations on its implementation (Taylor, 2012). The Australian Institute of Company Directors stated that it has been observed where companies went into administration just to avoid the complication of trading insolvent. It further stated that the directors are quite concerned about their own liabilities and their decision making power, which basically obstruct them from choosing trading insolvent (Vadi, Vissak and Olivas-Lujan, 2013). The decision of a director of a company will not be applicable to the company or himself but to the future and present aspect of every person who is involved in the company. Most of the cases notice that the companies are placed in to administration even before it is required due to the structure of the current law (Wardrop, 2011). The Australian Institute of the Company’s Director further laid down that in its opinion, the application of the provision of the safe harbor would actually bring innovative result in the business sector, thereby resulting in increased competition. It stated that will place innovation in the market rather than making a company to struggle, leaving no option in its hand.
In this aspect, it was stated that the restructuring if implemented shall not be endless in nature, thereby causing its misuse and creating a group of Zombie companies by delaying the process by the Productivity commission.
The Australian Shareholders Association on the other hand stated that the implementation of the idea of safe harbor can lead to exposing the shareholders to a greater risk (Williams, 2015). It stated that it has a big doubt as to success of the application of safe harbor on the directors as it depends on various factors like ability of the company in regards to restructuring and the quality of advisor employed for the company restructure etc. All this factors may just delay the entire process of decision making of the directors. This delay in the process will result in the reduction of the assets which are the fruits for the shareholders.
Another major obligation that has been noticed in the process is that under the current law, the external administrator appointed is generally liable for the financial condition of the company in future (Baxt, Harris and Finnane, 2013). But if safe harbor is implemented while the company is being handled by an external administrator, then there is no available protection for the creditors in regards to the debts incurred in the due course of external administration (Corporations. Rights of Stockholders. Payments to Preferred Stockholders in Liquidation under Public Utility Holding Company Act Not Limited to Amount of Liquidation Preference, 1946).
The very main obligation that is to be mentioned herein is the director of a company acting in good faith. It is very difficult to judge as to whether one person is working in good faith or not. Perception keeps varying all the time while assessing a person’s professional efficiency.
Bringing to your notice, that irrespective of the fact that the provision of insolvent trading is in existence in Australia for the last years, it has been recorded that only 103 cases have a record where the directors have been profited from it. In most the cases of insolvent trading, the directors lose it. This record basically implies that how insolvent trading has become a headache for company directors.
It has been held at different time spans that the implication of safe harbor for the directors may led to its misuse if its limit is not marked. It is quite a logical way to think that if any particular thing is made available unlimited in the market, then people would opt for it and make a misuse of this unlimited service. In the same manner if safe harbor if made available to the director’s option, then there would be a tendency noticed in the directors to avoid their part of liability.
Till date it has been noticed that insolvent trading creates a liability on the shoulders of the director of the future prospect of the company. Insolvent trading means that it would be trading with a great amount of risk on its shoulder. The trading in insolvency may bear fruitful result or may not. If it doesn’t come up with a fruitful result then the director become liable for it, thereby bearing the entire loss on their shoulder.
The provision of Safe harbor would give an opportunity to the director of the companies to restructure their company in the manner and as per the requirement. It will also give them a time to bear the debts that the company owes to the creditors outside. Though Safe harbor will give ample time to the director of the company to apply its skill again with proper suggestion of the external administration, yet it is to be noted that there is a high set of risk, as there is no such guarantee that this particular given opportunity for restructuring a company would bear a fruitful result from it. The restructuring might not be adequate in nature and it might happen that it fails the second time. So in my opinion it would not be right to provide the provision of safe harbor to all the companies, because its implication doesn’t provide for a definite result. There is an uncertainty still prevailing relating to the prospect of the company.
Insolvent trading will supposedly bear a liability on the shoulder of the director irrespective of the fact whether there is an introduction of the provision of Safe Harbor or not. Insolvent trading means allowing a director of the company to incur debts even when the company is running in insolvency. This somewhat helps the director to bring back the company in its position, but then failing to which might create personally liability on the shoulder of the director to pay the creditors the unpaid debts incurred during the companies insolvency period.
Introduction of the provision of Safe harbor will nowhere decrease the liability of the directors, for it will just provide an opportunity to the directors to restructure, failure of which will finally led to the same result to be known as liquidation of the company. Henceforth, in no manner the liability of the directors will be adjusted. Safe harbor is nothing but a new opportunity for the directors to utilize their ability and knowledge. Proper utility of which will deliver good result, thereby reducing the liability from the shoulder of the director. I disagree completely with the statement that introduction of the provision of safe harbor for company’s director would reduce the liability of them in insolvent trading.
Baxt, R., Harris, J. and Finnane, E. (2013). Corporations legislation 2013. Pyrmont, N.S.W.: Thomson Reuters.
Corporations. Rights of Stockholders. Payments to Preferred Stockholders in Liquidation under Public Utility Holding Company Act Not Limited to Amount of Liquidation Preference. (1946). Harvard Law Review, 59(7), p.1159.
Eales, P. (n.d.). Insolvency.
Hannigan, B. (n.d.). Company law.
Hartley, J. (2011). Director liability for insolvent trading.
James, P., Ramsay, I. and Siva, P. (n.d.). Insolvent Trading - An Empirical Study. SSRN Electronic Journal.
James, P., Ramsay, I. and Siva, P. (n.d.). Insolvent Trading - An Empirical Study. SSRN Electronic Journal.
Lingaitis, V., Dailydka, S. and Gnenny, O. (2013). DEFINITION OF LIQUIDATION PROPERTY VALUE. Business, Management and Education, 11(1), pp.19-33.
Lipton, P., Herzberg, A. and Welsh, M. (2012). Understanding company law. Pyrmont, N.S.W.: Thomson Reuters.
Loftus, J. (2011). Creditors v. community.
Loughrey, J. (2013). Directors' duties and shareholder litigation in the wake of the financial crisis. Cheltenham, UK: Edward Elgar Publishing Limited.
Morrison, D. (2002). The Australian insolvent trading prohibition?why does it exist?. Int. Insolv. Rev., 11(3), pp.153-172.
Sealy, L. (1989). Insolvent Company—Wrongful Trading. Cam. Law. J., 48(03), p.375.
Stiglingh, M. and Silke, A. (2010). Silke. Durban: LexisNexis.
Taylor, C. (2012). Company law. Harlow: Pearson.
Vadi, M., Vissak, T. and Olivas-Lujan, M. (2013). (Dis)honesty in Management. Bradford: Emerald Group Publishing Limited.
Wardrop, A. (2011). Not Ordinary Trading Companies: Common Law Responses to Insolvent Utilities in the United Kingdom, Australia and the United States. Common Law World Review, 40(3), pp.278-306.
Williams, R. (2015). What Can We Expect to Gain from Reforming the Insolvent Trading Remedy?.Mod. L. Rev., 78(1), pp.55-84.
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