In September 2017, a new piece of legislation known as the Safe Harbour provisions was added to the Corporations Act. Safe Harbour provisions give company directors protection from insolvent trading penalties and an opportunity to pursue strategies that could save their struggling business.
Historically, Australian companies faced strict, creditor-centric insolvency laws where directors would call in insolvency administrators to absolve or limit their personal liability from trading while insolvent. The Safe Harbour provisions created some protection for directors from this personal liability, provided they undertook a restructure of the company that would have a reasonable expectation of a better outcome for the company – and not just the creditors.
It is not a carte blanche approach, though. To qualify directors need to
- be closely monitoring and involved in the financial position of company and have: –
- Paid employee entitlement on time; and
- Have appropriate financial records which are kept up to date; and
- Ensure no misconduct by officers and employees; and
- Kept and maintained tax reporting records and obligations
develop a course of action that is reasonably likely to lead to a better outcome
The legislation does not define ‘reasonably likely’ or ‘better outcome’, nor has there been a judicial interpretation or legal precedents set. However, it is generally considered that an objective assessment is needed of the course of action to determine if it is reasonably likely to lead to a better outcome. This is where an experienced turnaround advisor is important, as the subjective opinion of the directors is not sufficiently meritorious.
I consider the start of entering a Safe Harbour as substantiation of the course of action through a turnaround plan assessed by the turnaround advisor as leading to a better outcome than entering voluntary administration. Note also that it must be the directors who need to develop and implement the plan. It is not the restructuring advisor’s plan, and without leadership and oversight by the directors, the plan will most likely fail. Also, ‘reasonably likely’ is when the decision is made to use the safe harbour provisions – not in hindsight.
The benefits of Safe Harbour are fourfold:
- It gives directors time to undertake a restructure of their business, remove the risk of insolvent trading and achieve a better outcome.
- ‘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.
- 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.
- Safe Harbour requires the engagement of an expert restructuring advisor – a Safe Harbour specialist. The Safe Harbour restructuring advisor works with the directors to plan to save the business, and the more the directors work with this specialist, the better the chance of achieving the better outcome. The Safe Harbour restructuring advisor will help directors by:
Working out the current financial position of the company
Assisting with cash flow forecasting and management
Ensuring directors comply with the requirements of the Safe Harbour provisions
Contracting the restructuring vs liquidation outcomes
Monitoring directors as they work according to their restructuring plan
Monitoring the better outcomes test to maintain directors’ protection
The biggest factor in achieving a better outcome is engaging with a Safe Harbour specialist early. The Safe Harbour specialist will help the directors objectively decide if a Safe Harbour restructure is the right strategy for their company. The earlier they are assisting your company, the greater the chance of achieving a better outcome.