What does Safe Harbour Insolvency mean?
Safe Harbour allows directors to take reasonable steps to trade the company out of financial difficulty without concerns about personal liability, or unnecessary effects to the potential value of the company by prematurely appointing a voluntary administrator.
It is a strategy where the directors remain in control and the ‘better outcome’ is for the business, employees and shareholders. On the other hand, formal insolvency options pass control of the company to the creditors, who ultimately decide its fate. Safe Harbour promotes a cultural change within the Boardroom to turn the company around.
What is the purpose of Safe Harbour Insolvency laws?
Safe Harbour gives directors time to undertake a restructure of their business, remove the risk of insolvent trading, and achieve a better outcome.
This ‘better outcome’ is for the company and all its stakeholders, including creditors, employees, customers, and shareholders. ‘Better outcome’ can mean that all these stakeholders will be better off, either by restructuring to make the company more viable in the longer term or preparing for a more orderly formal insolvency.
What are Safe Harbour Insolvency Provisions?
Safe Harbour provisions give company directors protection from insolvent trading penalties and an opportunity to pursue strategies that could save their struggling business.
In September 2017, the Federal Government amended the Corporations Act to provide directors an avenue to continue trading even while the company was insolvent if there was a reasonable expectation of a better outcome. That outcome is defined as ‘better’ than the immediate appointment of an administrator, or liquidator, to the company.
On 22 March 2020, the Act was further amended amidst COVID-19. These new amendments provided further relief for financially stressed businesses, including an additional ‘safe harbour’ from insolvent trading liability regarding debts incurred during the following six months ‘in the ordinary course of the company’s business’.
This COVID Safe Harbour provides useful additional relief for companies and their directors, particularly those dealing with unprecedented changes to their business conditions and need time to assess the company’s position before developing a turnaround plan or pursuing an insolvency administration. Unlike the 2017 Safe Harbour provisions which are in place permanently, the Government will discontinue the COVID Safe Harbour by the end of 2020.
Safe Harbour starts when the decision is made to commit to the process, and the development of a course of action starts. However, the safe harbour provisions end when it is no longer reasonably likely that the course of action will lead to a better outcome. It also ends when the course of action is not followed.
Am I eligible for Safe Harbour Insolvency ?
Safe Harbour is only available to directors who are closely monitoring and involved in the financial position of a company and have:
● Paid employee entitlement on time; and
● Have appropriate financial records which are up-to-date; and
● Ensured no misconduct by officers and employees; and
● Kept and maintained tax reporting records and obligations.
The directors also need to develop a course of action that is reasonably likely to lead to a better outcome.
How can you get started with Safe Harbour Insolvency?
Before considering Safe Harbour, or putting your company in voluntary administration, talk to a turnaround advisor. Know that using the Safe Harbour provisions will be hard.
Directors also must:
● Have the energy and desire to drive the turnaround
● Understand their obligations
● Know the company’s financial position
● Seek appropriately qualified advisors to advise them
● Put a plan in place and document decisions made
● Continually review the course of action to ensure it is reasonably likely that there will be a better outcome
How do you declare Safe Harbour Insolvency?
Safe Harbour can be completed in privacy. Formal insolvencies are done in public, which can have an adverse impact on the value of the company, the ability to refinance, and in some industries such as the construction industry, the ability to continue operating.