Australia’s Safe Harbour provisions protect directors from personal liability for insolvent trading while undertaking a restructuring that is likely to result in a better outcome for the company. Claiming Safe Harbour allows directors to address the business’ financial distress without using formal insolvency mechanisms like Liquidation or Voluntary Administration. This leads to better outcomes for the company, its creditors, employees, shareholders and directors.
Overview of the Safe Harbour Insolvency Laws
Safe Harbour (section 588GA of the Corporations Act) protects the directors of a company from personal liability that may arise while making a legitimate attempt to save the business from insolvency, Liquidation or Administration. Safe Harbour allows directors to undertake a “solvent restructuring” of the company. This typically leads to better outcomes than formal insolvency proceedings, and increases the chances of the business’ survival.
Australia’s Safe Harbour insolvency laws provide a bigger timeframe that directors can use to implement a solvent restructuring plan. Without the risk of being held personally liable for insolvent trading, directors have more opportunity to save the business and provide a better outcome for its creditors, employees and shareholders.
Safe Harbour is open to directors who make an honest and legitimate attempt to save the company. To claim Safe Harbour you must also take appropriate steps to ensure:
- Employee entitlements are paid when they are due
- Your tax returns, lodgements, statements and applications are up to date
These conditions may be difficult to meet if your company is in financial distress. However, these conditions also ensure the company is in a position to benefit from a restructure. If your company is unable to meet these conditions then it’s better to explore Voluntary Administration or Liquidation.
What Is Insolvency?
A company is considered insolvent if it becomes unable to pay its debts as and when they are due. If a business is insolvent, or if its directors suspect that it will become insolvent, they may appoint an Administrator or Liquidator to resolve the issue and/or wind up the company.
Common signs that a business is insolvent include:
- Ongoing losses
- Cash flow problems
- Taxes going unpaid
- Employee entitlements going unpaid
- Difficulty obtaining new credit
- Suppliers requesting payment prior to delivery of goods
- Creditors threatening or commencing legal action
Entering insolvency proceedings allows a company’s creditors to recover some (or all) of the money they are owed. These solutions are very final and may not be the best option for every business.
The Risks of Trading While Insolvent
In Australia, company directors have a duty to prevent insolvent trading. If a company is unable to pay its debts as and when they are due, but continues to trade and incur new debts, the directors may be guilty of insolvent trading.
Directors who knowingly trade whilst insolvent can be held personally liable for debts incurred by the company (such as ongoing losses, outstanding taxes and employee wages and entitlements). Insolvent trading is also a criminal offence that is punishable by:
- A fine of up to $200,000, or
- Up to 5 years imprisonment
If you are found guilty of insolvent trading you may also be disqualified from acting as the director of a company for up to 5 years. While it’s uncommon to be convicted of these offences, knowingly trading while insolvent carries major risks for directors.
When Does Safe Harbour Apply?
Safe Harbour provides protection if a director takes actions that are “reasonably likely to lead to a better outcome” for the company. The Corporations Act includes a number of appropriate Safe Harbour steps, such as:
- Taking action that prevents employee and officer misconduct
- Ensuring the company is keeping appropriate financial records
- Hiring a Qualified Adviser to provide professional advice
- Staying informed about the company’s financial situation
- Developing a Restructuring Plan
Taking steps along these lines indicates that directors are well-meaning. If your Restructuring Plan fails and you need Safe Harbour, demonstrating that you took these sorts of actions can help you claim protection.
Why Is Safe Harbour Needed?
Insolvent trading carries serious punishments, including fines, jail time and personal liability for company debts. This has caused concern that company directors may prematurely appoint an Administrator or Liquidator, rather than trying to resolve the company’s financial problems.
Safe Harbour is needed to encourage well-meaning directors to trade on while restructuring the business outside of formal insolvency proceedings (such as Voluntary Administration). That is, if the directors can develop a Restructuring Plan that is “reasonably likely to lead to a better outcome” for the business, Safe Harbour provides protection against claims of insolvent trading.
Debts Covered by the Safe Harbour Provisions
Safe Harbour doesn’t protect a company’s directors from all debts. Instead, it protects directors from debts that are incurred while attempting to save the business from its financial problems. This includes debts that are directly and indirectly related to the action you are taking, such as paying for professional advice and the ordinary costs of trading.
For example, if you think your company may become insolvent, you could implement a Restructuring Plan in an attempt to save the business. The Restructuring Plan may include expenses like:
- Hiring professional restructuring advisors
- Applying for new lines of credit
- Purchasing equipment to streamline your operations
- Ordinary operating expenses (such as employee wages, taxes and ordering goods from suppliers)
Safe Harbour may also protect you against significant expenses incurred during the restructuring process. Any significant expenses that fall outside of your normal operation should be considered carefully. Safe Harbour only provides protection for “reasonable” expenses, so you may be required to prove how significant purchases and expenses benefit the business.
If the Restructuring Plan is unsuccessful, or if the company becomes insolvent while the plan is being implemented, Safe Harbour can still protect the directors from being personally liable for these expenses.
Developing a Restructuring Plan
A Restructuring Plan is a formal document that lays out the directors’ plan for saving a company from insolvency. This document not only acts as a roadmap, it serves as proof of your good intentions if you need to claim Safe Harbour.
Your Restructuring Plan should be a written document that includes details about:
- The objective. This will typically be to return to solvency, but it can also be a resolution to reach a “better outcome” than immediately appointing a Liquidator or Administrator.
- Your restructuring strategy. Include detailed information about the actions that will be taken to reach the objective (such as selling assets, downsizing, restructuring operations and refinancing credit).
- Milestones and measurement tools. The markers you will use to review your plan and measure whether your actions are having the desired effect.
- Professional advice. Provide information about any attempts to obtain professional help from a qualified adviser. This document should also be updated to include details about the advice you receive.
- Financial records audit. Conduct an audit of your financial systems (such as how finances are reported) and include the results to demonstrate you have taken reasonable steps to remain up to date on the company’s financial situation.
While you don’t necessarily need to consult a qualified adviser to claim Safe Harbour, we strongly recommend that you develop your Restructuring Plan with professional input. Professional advice greatly increases the likelihood of success and ensures that you will be entitled to Safe Harbour if the Restructuring Plan is unsuccessful.
What if the Restructuring Plan Is Unsuccessful?
Developing a Restructuring Plan does not guarantee a company will survive its financial troubles. If the Restructuring Plan fails, the directors may still enter Voluntary Administration or Liquidation. Provided your actions prior to this are deemed to be reasonable, you will be eligible for protection under Safe Harbour.
Proving Eligibility for Safe Harbour Provisions
Under the Corporations Act, company directors are responsible for demonstrating that the Safe Harbour exception is applicable. You may need to prove your eligibility to the Liquidator, ASIC or other parties that are seeking to make you personally liable for insolvent trading.
In most cases this is as simple as presenting your Restructuring Plan. Having a formal plan is a clear indication of your intentions and the actions you took to save the business. After presenting a Restructuring Plan, it becomes the Liquidators’ responsibility to establish whether the directors took reasonable actions in an attempt to reach a better outcome.
How SV Partners Can Help
The team at SV Partners are financial advisors with decades of experience in Restructuring, Liquidation and Voluntary Administration. Our expertise allows us to assess your business’ position and develop a tailored strategy for resolving financial distress. Where appropriate, we can also determine whether you are eligible for Safe Harbour and provide advice on your Restructuring Plan.
For an obligation free consultation, you can contact us online, or phone our confidential assist line on 1800 246 801.