Introduction of Safe Harbour provisions


Australian companies should consider Safe Harbour provisions first instead of forcing directors to place their companies into administration prematurely.

As part of the Government’s insolvency law reform, the Safe Harbour insolvent trading provisions began on 19 September 2017. Safe Harbour provisions encourage directors to pursue restructuring opportunities that will deliver a ‘better outcome’ for all stakeholders (shareholders, directors, employees, suppliers, lenders, customers) compared to the immediate liquidation or administration of the company.

At Byronvale Advisors, we believe it is vital for Australian businesses to understand how Safe Harbour can help turn their company around, so we have broken down and explained the fundamental factors and consideration for a better outcome in detail.

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How do the 2017 Safe Harbour Provisions Work?

To obtain the benefit of the 2017 Safe Harbour provisions, directors must be able to show that the course of action adopted by the company is ‘reasonably likely’ to lead to a ‘better outcome’. This course of action comes in the form of a written plan that can help directors restructure and trade the company out of its financial difficulties as opposed to prematurely seeking the appointment of an administrator or liquidator.

What does the concept of ‘better outcome’ mean?

A ‘better outcome’ is an outcome that is better for the company than immediately appointing an administrator, or liquidator. Safe Harbour encourages company directors to remain in control of a financially distressed company and take reasonable steps to restructure and allow it to trade out of its difficulties.

Who qualifies for Safe Harbour?

To qualify for Safe Harbour, directors must be honest and diligent in ensuring the company has:

  •  Been incorporated in Australia
  •  Fulfilled its obligations to maintain adequate books and records
  •  Paid employee entitlements as and when they fall due (including superannuation)
  •  Ensured tax reporting obligations remain up to date (being no more than three months in arrears)

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What do directors need to know about Safe Harbour?

Safe Harbour provisions in the Corporations Act offer directors protection from civil insolvent trading provisions within the Corporations Act while a company is attempting to restructure or turn its financial position around.

Directors must comply with certain requirements to rely on the Safe Harbour provisions in s588GA, including:

  •  Continuously meeting their employee entitlements (including superannuation) and tax reporting obligations
  •  Developing courses of action which are reasonably likely to result in a better outcome for the company than immediately appointing an administrator or liquidator
  •  Ensuring no misconduct by officers of the company

The factors considered in determining if the course of action is reasonably likely to lead to a better outcome are:

  •  Getting appropriate advice
  •  The maintenance of proper financial records
  •  Ensuring all directors remain informed of the organisation’s financial position
  •  Implementing appropriate measures to prevent misconduct by the company’s officers and employees

What steps directors should take when conducting Safe Harbour

Directors must:

  •  Ensure no outstanding employee entitlements need payment and ensure the company can keep paying employee entitlements as and when they fall due.
  •  Make sure the company is meeting all its tax reporting obligations and implement systems to ensure it keeps meeting these obligations.
  •  Ensure no outstanding issues of employee and officer misconduct need to be resolved. Directors must ensure employees comply with company policies and that any misconduct committed will be identified and adequately dealt with.
  •  Obtain appropriate advice from a turnaround and restructuring advisor.

What does the Safe Harbour Restructuring Plan look like?

A restructuring plan comprises:

  •  Its principal objective (which is usually a return to solvency, but if not, a ‘better outcome’).
  •  An outline of steps taken to receive advice from an appropriately qualified advisor.
  •  An outline of future steps to avoid misconduct that could negatively affect the company’s ability to pay all its debts.
  •  The directors’ conclusion of how the company keeps appropriate financial records.
  •  The strategy and actions to deliver the principal objective
  •  Measures and milestones to review the effectiveness of the restructuring plan.
  •  Frequent reviews involving the Restructuring Advisor

Vital things to remember about Safe Harbour

For the best chance of relying on Safe Harbour during the execution of a turnaround strategy, directors should:

  •  Seek advice early
  •  Engage qualified advisors who specialise in turnaround and restructuring plans
  •  Ensure all reporting obligations and employee entitlements are up to date
  •  Document plans and decisions to provide evidence (if Safe Harbour protection is challenged).

Safe Harbour Conclusion

The 2017 law reforms aim to develop a culture of restructuring the company’s future so all stakeholders (shareholders, directors, employees, suppliers, lenders, customers) have an opportunity to obtain a better outcome if a company is in financial distress.

Please contact our team for more information and find out how Safe Harbour is right for you.

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