Key takeaways

1. The Australian Securities & Investment Commission (ASIC) has in December 2024, updated its Regulatory Guide 217: Duty to prevent insolvent trading: Guide for Directors (RG217). The update follows the Commonwealth Government’s response to the Review of the Insolvent Trading Safe Harbour report (Review) released in March 2022. Amongst other things, the Government noted the recommendation in the Review that RG217 be updated to provide general guidance on the operation of the safe harbour protection from insolvent trading.
2. The safe harbour protection which became live under Australian law in September 2017, has been a game changer for Australian boards, particularly in the medium to large cap space, where boards seek to undertake debt and/or equity restructurings and/or operational turnarounds, in distressed contexts. The protection is for the direct benefit of directors and acts as a shield to their personal liability for insolvent trading where, following a suspicion that the company may become or is insolvent, they start developing one or more courses of action, that is or are reasonably likely to lead to a better outcome for the company than the immediate appointment of an administrator or liquidator.
3. The interpretation and implementation of this shield can in certain circumstances be quite simple but, in many circumstances, requires careful consideration and planning with experienced financial and or/legal advisors in the restructuring and turnaround space. RG217 should therefore be utilised as a tool and not as a substitute for advice.
4.  It is pleasing to see that RG217 captures many of the practical takeaways that flow from the case law in the area of distressed restructurings, and so provides pragmatic guidance to boards. The guide should be used in conjunction with the Turnaround Management Association Safe Harbour Guidelines (turnaround.org.au/looking-for-turnaround-assistance/how-turnaround-helps). Of course, bespoke financial and legal advice should always be sought, particularly in respect of the implementation and monitoring of any restructure plan developed by a board, to ensure the plan properly addresses the company’s underlying issues and satisfies the relevant legal framework.

RG 217 in detail
Background

1. On 6 December 2024, following various stakeholder consultations, the Commonwealth Parliament’s report on the Review of the Insolvent Trading Safe Harbour released on 23 November 2021, and the 2023 Parliamentary Joint Committee Report released on 12 July 2023 that considered among other things, insolvent trading and safe harbour, ASIC published regulatory guide, RG217 to assist directors and professional advisors.
2. The RG217 released on 6 December 2024 supersedes the previously issued edition of RG217 issued in July 2010 and reissued in August 2020.
3. The key inclusions in the current RG217 compared to the predecessor version include:                                                                    a. the incorporation of guidance concerning safe harbour protections available to directors in Parts A and C, including specific examples in a safe harbour context;                                        b. ASIC’s assessment and approach to the establishment of safe harbour protections by a director in Part D; and                                  c. criteria and/or factors to consider as to the suitability of a professional advisor.

What is RG217?

1. RG217 is a regulatory guide for directors of companies at all levels  and professional advisors to directors of a substantive background  of a director’s duty to prevent insolvent trading, and protections available to a director in the form of safe harbour.
2. RG217 provides significant detail of the safe harbour regime and  incorporates various simple and practical examples in distilling  the necessary elements.
3. Consistent with its previous release of RG217, ASIC sets out            various factors it considers in ascertaining whether a director has contravened their duty (whether at law, equity or statute). In          addition, it now provides relevant guidance as to its consideration on the entitlement or successful establishment of a director’s ability to rely on safe harbour protections.
4. As with all guides, it should not be regarded as exhaustive or solely relied upon, but in conjunction with specialist expertise and  advice from appropriately qualified and competent professional advisors specific to the company’s particular circumstances.
5. The revised RG217 guide restates four (4) key, overarching              principles which are practical and very much in line with how          properly advised directors should act if looking at any operational or debt/equity restructuring:
   a. Key principle 1 – Actively monitor company solvency;
   b. Key principle 2 – Investigate financial difficulties;
   c. Key principle 3 – Obtain advice from professional advisers                where necessary; and
   d. Key principle 4 – Act in a timely manner.

Insolvent Trading – Four (4) Key Principles

Key Principle 1 – Actively monitor company solvency – Directors (executive and non-executive) are required to actively monitor and inform themselves of the financial position of the company that they are appointed to. Informing oneself may include the oversight of the preparation and maintenance of financial/management accounts, establishing procedures and processes that allow for reliance on information and advice provided by suitably competent and qualified persons (such as an accountant, chief financial officer, lawyer etc) noting any reliance is subject to factors set out at RG217.48.

Key Principle 2 – Investigate financial difficulties – In circumstances where a director of a company reasonably suspects their company is experiencing financial difficulty such that the company is already insolvent or is likely to become insolvent at some future point in time, they should confirm the company financial position and options available to the company based on that financial position, by way of obtaining competent advice from qualified professional advisors (set out at Key Principle 3). ASIC sets out in Table 2 to the appendix factors that an objective hypothetical reasonable person in such office would consider.

Key Principle 3 – Obtain advice from professional advisers where necessary – Where a director or directors of a company have resolved that the company is in financial difficulty, appropriate professional advice should be obtained from appropriately qualified, competent, reliable and insured professional advisors that can assist in the particular company’s circumstances. Professional advisors may include solicitors, registered liquidators, accountants, auditors etc. ASIC provides guidance on the appropriate advice that a director should consider obtaining including, the solvency of the company and risk of insolvent trading, options available to the company, and the continued viability of the company while undertaking a restructuring of its affairs.

Key Principle 4 – Act in a timely manner – This principle is commonly not adhered to or heeded, preventing a company from continuing to trade and/or to undertake a restructuring of its affairs, without avoiding an external administration process. Where a director suspects on reasonable grounds that the company is insolvent or is likely to become insolvent at some future point in time, the director should not defer or delay from acting promptly to seek among other things, professional advice. For the purposes of potential reliance on safe harbour protections, if the company was to enter into an external administration process such as a liquidation, documenting and recording the steps and course of action taken in addressing the company’s potential or actual insolvency will be pivotal.

Insolvent Trading & Safe Harbour Liability Protection

1. The safe harbour protection provided for under section 588GA of the Corporations Act 2001 (Cth) acts as a carve out to liability for insolvent trading, where a director or directors of an insolvent company develop a course or courses of action that are reasonably likely to lead to a better outcome for the company comparatively to a voluntary administration or liquidation.
2. The application of the protection requires:
   a. the development and implementation of a course or courses of action that is reasonably likely to lead to a better outcome for the company than administration or liquidation (s 588GA(7) of the Corporations Act 2001 (Cth)); and
   b. satisfaction of 2 threshold under s 588GA(4) of the Corporations Act 2001 (Cth), including compliance with payment of employment entitlements and lodgement of statutory returns under applicable taxation laws.

A – Course of Action & Protection Commencement

1. A director of a company will enter into safe harbour following the director starting or commencing the development of one or more reasonably formed courses of action that is reasonably likely to result in a better outcome for the company rather than immediate administration or liquidation. Any course of action will not be sufficient and must be grounded on reasonableness and rationality. Examples of courses of action include an equitisation of debt (debt/equity swap), asset sales, equity rights offerings, restructuring (such as a corporate spin-off), compromise of liabilities, and/or implementation of particular procedures or processes tailored to address a specific issue. This is where experienced restructuring and turnaround financial and legal advisers should be consulted to advise on whether the detailed elements comprising the courses of action are appropriate in the company’s circumstances.
2. The protection does not arise once the course of action is implemented, but from the point of formulation or development. This is of course, often not a clear point in time. It is therefore prudent and highly recommended that contemporaneous notes are taken at the time of developing these courses of action, including any advice obtained on those courses of action as part of factually determining the point in which a director may have become eligible for safe harbour protection (assuming the remaining eligibility elements have been satisfied).

B – Better Outcome & Reasonably Likely

1. The threshold imposed by the Corporations Act 2001 (Cth) is that the course/s of action developed is or are reasonably likely to lead to a better outcome for the company than an administration or liquidation. The course of action will vary based on the circumstances and information known to the company (noting accuracy and reliability of information provided/obtained are crucial), the degree of difficulties and complications experienced, and industry of operation. ASIC at RG 217.95 of RG217 provides examples of courses of action and reasonably likely (or unlikely) outcomes.
2. Section 588GA(2) of the Corporations Act 2001 (Cth) provides non-exhaustive factors that be considered in determining whether a course of action is reasonably likely to lead to a better outcome for a company, including among other things:
   a. ensuring the company keeps and maintains appropriate financial records proportionate to its size and nature;
   b. the company or director obtaining advice from an appropriately qualified entity who was provided with sufficient detail and information to allow proper advice to be provided; and
   c. the director properly informing his or herself of the company’s financial position.
3. The result of such an analysis is often referred to as a “Better Outcome Report” which is, in many circumstances, a financial report prepared by a properly qualified and experienced insolvency accountant for the benefit of the board.
4. It should be recognised that a course of action taken at the outset may vary over time based on various events which may occur including for example, material changes in key asset prices, or the price of debt. This requires the company and/or director to adjust or transition to a more appropriate particular course of action over time, based on evolving circumstances and information. This is also where properly qualified and experienced financial and legal advisors can support boards.
5. At RG217.91 to RG217, ASIC refers to the Explanatory Memorandum to provide clarification on the term ‘reasonably likely’, which requires there to be a chance of achieving a better outcome that is not fanciful or remote, but is ‘fair’, ‘sufficient’ or ‘worth noting’. The Explanatory Memorandum articulates that a probability of greater than 50% is not required when construing the term ‘reasonably likely’. The course of action that varies on the company and its circumstances at the time the decision is made, and should be based on relevant and accurate information, developed using good judgement, and objectively reasonable in the company’s circumstances. Again, this is where advisors, with experience in dealing with restructurings and the relevant legal framework, can assist.
6. Where the course of action (including any amendments) does not continue to satisfy the ‘reasonably likely’ test, the safe harbour protection is unlikely to remain applicable and be relied upon by the director. This is why monitoring and testing a safe harbour plan is key.

Evidentiary matters

1. At Part D of RG217, ASIC sets out at Tables 2 and 3, a list of factors and evidence it expects a party to maintain as part of its assessment and determination of the commission of a breach of duty by a director or the ability for a director to rely upon safe harbour protections in avoiding liability for insolvent trading. These are very instructive and in line with what we would advise boards, as matters of best practice.

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