When a company faces financial difficulty, directors must carefully weigh the need to turn around a company’s financial performance against the risk of being held personally liable for insolvent trading if the company is ultimately placed into liquidation.
Fortunately, the Safe Harbour provisions under section 588GA of the Corporations Act 2001 (Cth) (Corporations Act), referred to below as Safe Harbour Protection, provide a framework that allows directors to pursue a genuine recovery plan while limiting their personal exposure for insolvent trading.
What is Safe Harbour Protection?
Safe Harbour Protection offers a pathway for directors to turnaround a company’s financial position without the immediate concern of being held personally liable for company debts under an insolvent trading claim.
To qualify, directors must:
- Develop (and then implement) one or more courses of action that are “reasonably likely” to result in a better outcome than immediately entering into a formal insolvency process like voluntary administration or liquidation;
- Ensure the company pays all entitlements of its employees that are payable; and
- Ensure all returns, notices, statements, applications or other documents are completed as required by taxation laws (for example Business Activity Statements, Income Tax Returns, etc).
These steps appear straightforward, but the critical question is: what practical actions must be taken to ensure a course of action is “reasonably likely” to result in a better outcome?
Whilst it is not yet well-established at law, the Corporations Act does prescribe some practical steps, which include:
- Staying informed about the company’s financial position;
- Taking steps to avoid misconduct by officers and employees of the company;
- Maintaining proper financial records for the company appropriate for its size and nature;
- Seeking advice from an appropriately qualified entity, such as an insolvency practitioner or turnaround specialist; and
- Developing and implementing a turnaround plan.
To rely on Safe Harbour Protection, it is considered best practice for a director to comply with all the steps outlined above. Importantly, where a company has multiple directors, each individual director must independently demonstrate they have met the requirements for Safe Harbour Protection. This is not a responsibility that can be delegated or fulfilled by a co-director on their behalf.
How Can Safe Harbour Protection Help?
Safe Harbour Protection can provide the breathing space needed to:
- Restructure operations or reduce costs.
- Renegotiate with creditors and suppliers.
- Secure new investment or finance.
- Maintain business continuity and protect jobs.
By allowing directors to pursue a practical turnaround, Safe Harbour Protection supports long-term business viability and can help preserve value for all stakeholders.
Consider the example of an independent aged care facility that was facing high staffing costs, lost revenue opportunities, staffing and human resourcing issues and had encountered trading losses that were not sustainable for some time. The company’s board consisted of volunteer directors who were not involved in day-to-day operations and were worried about the long-term viability of the company.
The Board believed there were opportunities for significant financial improvement, and that with the assistance of the executive management team, the company could return to a profit.
After seeking advice on Safe Harbour Protection, the directors:
- Engaged and continued to seek advice from professional advisors to assess the financial position of the company, who liaised with the executive management team to report to the Board on a regular basis;
- Developed and implemented a restructuring plan, which focused on reducing staffing costs, increasing revenue and improving operational efficiencies across the company’s business; and
- Obtained the advice and support of third-party advisors and industry experts to assess operational deficiencies and provide recommendations to improve the company’s financial position (along with support to implement the required changes).
After encountering years of financial and operational challenges, within months, the company’s performance improved significantly and returned to making a profit!
The directors avoided personal liability throughout this process and the company avoided voluntary administration or liquidation. In addition, the directors and executive management team developed the necessary skills to monitor and manage any future financial pressures experienced by the company.
Timely Advice is the Key to Success
Safe Harbour Protection is a valuable tool for directors and companies facing financial difficulty, offering a chance to restructure and recover. It encourages an honest assessment of a company’s financial position (by appropriately qualified advisors), proactive decision-making, supports job preservation and helps maintain trust with stakeholders.
The key to success lies in taking early action, obtaining expert advice, and demonstrating a genuine commitment to implementing necessary change.
If you or your client are facing financial difficulty, we encourage you to reach out to your local SV Partners’ office and seek appropriate advice – obtaining Safe Harbour Protection and timely advice may be the best thing you ever do!
Article written by Daniel Luckman (Associate Director) – Sunshine Coast