A tale of safe harbour and misleading and deceptive conduct: lessons for directors and company officers
While company directors will generally be held personally liable for insolvent trading, the safe harbour provisions under section 588GA of the Corporations Act 2001 (Cth) (Corporations Act) provides protection, if certain conditions are met.
In the case of Octet Finance Pty Ltd v Macgregor [2026] NSWSC 103, Justice Hmelnitsky provides some context about the operation of safe harbour for directors and a salutary tale about making representations about a company’s financial position where that position changes markedly in a relatively short time period.
Factual Background
From early 2022, the directors of the financially distressed piemaker Mrs Mac’s Pty Ltd (Mrs Mac’s) began attempts to solicit new investment to prevent an impending insolvency. These attempts were deliberately structured to provide the directors with the protection of the safe harbour provisions under section 588GA of the Corporations Act 2001 (Cth) (Corporations Act).
These efforts eventually resulted in an agreement with United Petroleum Pty Ltd (referred to by the parties as ‘Pie Face’) under which Pie Face acquired most of Mrs Mac’s assets and employees, but not their liabilities. This deal enabled Westpac, the major secured creditor for Mrs Mac’s, to be repaid in full, although the unsecured creditors did not receive full repayments.
The plaintiff, Octet Finance Pty Ltd (Octet) was one of these unsecured creditors. Octet provided a revolving facility that enabled Mrs Mac’s to maintain liquidity given the differential payment schedules between its customers and suppliers. At the time of Mrs Mac’s liquidation, Octet failed to recover any of its debt.
Octet initiated claims for misleading or deceptive conduct in breach of section 18 and section 236(1) of schedule 2 of the Competition and Consumer Act 2021 (Cth) – The Australian Consumer Law (ACL).
The relevant conduct was mostly engaged in by Mr Markwart, the CFO and company secretary of Mrs Mac’s.
Alleged Misrepresentations of Mr Markwart
On 29 July 2022, in response to an article published in the Australian Financial Review (AFR) reporting on Mrs Mac’s dire financial position the night before, Octet contacted Mrs Mac’s raising concerns over their repayment.
In an email in response, Mr Markwart made representations that Octet should have a high degree of confidence that they would be paid following the recapitalisation process. Similar representations were repeated on 4 August 2022.
It was argued that Mr Markwart’s silence and failure to correct Octet’s misapprehension about the financial health of Mrs Mac’s and their prospects of being repaid amounted to misleading and deceptive conduct.
Importantly, Mr Markwarts silence and failure to correct continued even after it later became clear to him that it was unlikely that Octet would be repaid in full.
Issues
Did Mr Markwart’s conduct constitute misleading and deceptive in breach of section 18 of the ACL?
Was Mr Markwart acting as an agent of the directors of Mrs Mac’s in his personal capacity as opposed to as an employee of the company when he engaged in that conduct?
In the alternative, were the directors of Mrs Mac’s involved in Mr Markwart’s misleading or deceptive conduct in breach of section 236(1) of the ACL?
What loss, if any, did Octet suffer because of Mr Markwart’s conduct?
Court Findings
Mr Markwarts silence and failure to correct was misleading or deceptive
The Court found that the express representations made by Mr Markwart were not misleading or deceptive.
In assuring Octet that they would likely be repaid, Mr Markwart was making a representation as to a future matter. Under section 4 of the ACL, representations on future matters may be misleading unless its maker can demonstrate that they had reasonable grounds for making the impugned representation.
At the time Mr Markwart made the representation on 29 July 2022, the only investment offers that had emerged would all have resulted in Octet being repaid in full. Consequently, the Court concluded that Mr Markwart had reasonable grounds to make the representations that Octet was likely to be repaid.
However, by 22 September 2022, Mr Markwart became aware of the offer from Pie Face and understood that while it was likely to be accepted as it was Westpac’s strongly preferred offer, it would leave unsecured creditors like Octet largely unpaid.
For Octet to establish that Mr Markwart’s silence despite this knowledge was deceptive, they needed to establish that they held a reasonable expectation of disclosure of their true prospects for repayment.
While the court acknowledged that the bar for establishing a reasonable expectation of disclosure is far higher for a sophisticated commercial actor such as Octet, it had been met in the given circumstances.
Of particular importance was the fact that Mr Markwart had actively created the misapprehension the repayment was likely through his express statements, even if they were reasonable at the time. These assurances were given to persuade Octet to remove the stop that had been placed on the facility following the AFR article.
It was also important that Octet could not have obtained the information being withheld by Mr Markwart through any other means, so this was not a case of a commercial actor failing to perform appropriate due diligence.
Mr Markwart was not an agent of the directors of Mrs Mac’s in their personal capacity
Even though Octet was able to make out misleading conduct on the part of Mr Markwart, if those actions were carried out in his capacity as an employee of Mrs Mac’s, they would only be entitled to recover damages from a company that was clearly in no position to pay.
Consequently, Octet attempted to establish that Mr Markwart was in either an express or implied agency relationship with the directors of Mrs Mac’s in their personal capacity in an attempt to recover from the directors personally.
The basis for the express agency argument was a board meeting held on 29 June 2022, during which KPMG gave advice to the directors on how to enliven the safe harbour provisions under the Corporations Act. The advice from KPMG included an outline of things the directors were required to do to receive safe harbour protections, including a requirement to “continue to actively manage its short-term liquidity”.
Octet argued that to give effect to KPMG’s advice, it was necessary to appoint Mr Markwart as their agent and so it must have occurred at this meeting.
This was rejected by the Court because:
there was no evidence that Mr Markwart was appointed in the minutes or witness statements;
it was unclear why it was necessary to appoint Mr Markwart as an agent for the directors;
to the extent that any of Mr Markwart’s actions had any relevance to enlivening safe harbour protections, they related to responsibilities he already held as CFO and company secretary of Mrs Mac’s.
The basis for the implied agency argument is the Mr Markwart was acting for the personal benefit of the directors rather than the company.
While section 588GA of the Corporations Act makes directors personally liable for insolvent trading, the safe harbour provision under section 588GA provides protection against personal liability under certain conditions. Of particular importance is the condition that the debts are being incurred under a course of action that is reasonably likely to lead to a better outcome.
Octet argued that by taking actions in accordance with the safe harbour provision to avoid personal liability for insolvent trading, the company directors were acting in their personal benefit. Consequently, they alleged that work being performed by Mr Markwart that fulfilled conditions of the safe harbour protections were being performed as an agent of the directors personally.
However, the Court made it clear that effect of the safe harbour provisions is not to supply a reward or incentive for directors to act in their own interests. Rather, the safe harbour provisions are intended to incentivise directors to find solutions that are more favourable to the company and investors than the alternative of insolvency or liquidation.
As a result, the Court rejected Octet’s argument, finding that the directors’ actions were not taken for their personal benefit, but for the benefit of the company. In addition, all the work Markwart was performing in connection to the restructuring was already within the scope of his role as CFO.
The directors were not liable for being “involved” in Mr Markwart’s misrepresentation
Under section 236(1) of the ACL, a person not who did not directly contravene the misleading or deceptive conduct provision may still face liability if they were involved in a contravention.
As an alternative to the agency argument, Octet attempted to recover from the directors by establishing that they were involved in Mr Markwart’s deceptive conduct. However, to establish a breach of section 236(1) in connection to misrepresentation by silence, it must be demonstrated that the directors knew, or ought to have known that Octet held a reasonable expectation of disclosure.
The Court concluded that there was no evidence to make such an inference.
Octet did not suffer significant compensable losses
The Court determined that the timeline for assessing loss began on 22 September 2022 when Mr Markwart became aware of the Pie Face offer. By this point, Octet was already owed $3,924,283.77, an amount that did not significantly increase after this date.
Octet submitted that if they had been properly informed of the true financial position, they would have immediately placed a stop on the facility and demand repayment of the outstanding balance to remove the stop. It was argued that, in response Westpac, as the secured creditor, would have agreed to either repay the balance out of sale funds or grant Octet a second order security as they were desperate to preserve the Pie Face deal.
However, the Court was unwilling to conclude that Westpac was likely to capitulate given that they had security over the assets being sold to Pie Face, and so could have appointed receivers if needed.
Key takeaways
Directors who take actions in order to enliven safe harbour protections are not acting for their personal benefit but are acting in the best interests of the company.
Actions taken by company employees in furtherance of safe harbour requirements do not, without more, give rise to an agency relationship between those employees and the company directors.
Care needs to be taken by those making representations about the financial status of a company, particularly where the person to whom the representation is being made will then engage in a course of conduct to their detriment. If the substance of the representation changes there may be a need to provide further details, retract prior statements or otherwise make a correcting or additional statement.
If you would like to discuss these circumstances, the safe harbour regime or how to address a company’s financial distress please contact:
Alicia Hill
Principal
T: +61 3 9611 0180 | M: +61 484 313 865
E: ahill@sladen.com.au
Jake Cole
Senior Associate
T: +61 3 9611 0112 | M: + 61 413 557 157
E: jcole@sladen.com.au
