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Safe Harbour
Wexted have found that, even after Safe Harbour processes are complete, our clients have benefitted from disciplines such as regularising review of forecasts, linking strategy to financial projections, understanding financial position closely, making decisions based on appropriate, complete data, and ensuring Boards are responsive to and cognisant of the impact of financial distress and the importance of governance.
Wexted work primarily with listed and mid-market businesses, as well as private equity owned businesses. We generally find that businesses with size and scale are better suited to intensive financial and operational restructuring. Insolvent trading actions must also be of some scale to be successfully commenced. Smaller enterprises can now better access other insolvency solutions such as Small Business Restructuring.
Should the restructure fail, and the company become subject to administration or liquidation, the Directors will provide documents to and assist the administrator/ liquidator as part of the statutory diligence into making recommendations to creditors or commencing insolvent trading claims. The Safe Harbour Advisor would, in usual circumstances, assist the Directors in the event there is an insolvent trading proceeding.
The Directors have the burden of proving whether a course of action is appropriate. The Safe Harbour Advisor should provide written reports confirming the course of action is a Better Outcome at a particular time, and that the process meets the requirements of the Act. Wexted recommend the Board pass resolutions to that effect and properly record the reliance on Safe Harbour in minutes of Board or Committee Meetings.
There is no time limit for a Safe Harbour appointment. It continues while the Directors maintain a suspicion of insolvency, as long as the company is eligible, and while the course of action can be implemented in a reasonable timeframe and is a Better Outcome. Some Wexted appointments have continued for several years.
Generally, the Safe Harbour Advisor does not liaise actively with stakeholders such as customers and suppliers. Engagement is most often limited to the Board, strategic senior employees, and other advisors. In some cases, the Board might elect to inform a Banking syndicate of the appointment, as a positive signal the company is implementing a restructure.
There are no adverse consequences of entering safe harbour per se, but care needs to be taken to ensure there are no unintended effects, such as disclosure triggers in a lending document. The commencement of safe harbour would not, in and of itself, usually activate insolvency events of default. However, the course of action might include elements (such as suspending payments or rescheduling debts) that might have such consequences.
In some cases, Safe Harbour roles involve considerable work such as the determination of strategy and forecasts, whereas on other occasions much of that work is undertaken by others (i.e. the Board or management) and the Safe Harbour advisor provides higher level Board and governance overlay.
The Advisor independently confirms that the company meets the eligibility criteria for Safe Harbour, assesses the restructure plan to see if it is reasonable and achievable, objectively and financially determines the better outcome, and ensures the outcomes are appropriately documented. There is also a requirement to continually review the plan and ensure that the counterfactual (i.e. a formal insolvency) does not become the better outcome.
To be eligible to access the defence, a Company must have had substantial compliance with and tax lodgements up to date, employee entitlements must be up to date and the company must maintain adequate books and records. If a Company does not meet the eligibility requirements and the Directors form the view that it is, or is likely to become, insolvent, the Directors will need to consider commencing a formal insolvency process.
No. Safe Harbour is not a regulated insolvency procedure under Chapter 5 of the Corporations Act. It is a series of actions that provide Directors a form of protection from the outcomes of regulated insolvency.
Unlike other formal insolvency options such as liquidation and administration, Safe Harbour is not a public process and there is no requirement to formally notify any authorities of the appointment. The ASX does not require a company to disclose to the market that its Directors intend to rely on Safe Harbour.
No. A Director will need to be able to demonstrate that, from a particular and specific time, they are developing a course of action.
The Safe Harbour commences when Directors and/or the entity are (a) eligible for Safe Harbour (b) have a suspicion of insolvency and (c) then start to implement a compliant course of action. Wexted consider that the burden of proof for commencement of the process will be the recording by the Board of those steps, or the engagement of an Advisor to undertake those steps.
Wexted consider that a Better Outcome is an objective, measurable financial test rather than a subjective test. Wexted calculate and project returns available to employees, lenders, creditors and equity under the Plan, and compare those to returns assuming an immediate insolvency event. That is, a comparison of the proportionate return in an immediate formal insolvency process versus the proposed outcome of the plan.
The board and management remain in control of the company. The Safe Harbour advisor reports to the Directors and advises on the course of action being implemented by the Board but has no powers of management.
While a Director must have regard to advice from an appropriately qualified advisor (or advisors), there is no specific requirement for that person to have specific qualifications. Wexted’s view is that aspects of Safe Harbour protection, such as the determination of a better outcome, should ideally involve a restructuring professional or registered liquidator. Other aspects of Safe Harbour advice can quite competently be undertaken by individuals suited to the circumstances of the course of action, such as lawyers, investment bankers, governance professionals or engineers/ industry experts.
The Director has the burden of proving a course of action is ‘reasonably likely to lead to a better outcome’. The company must pay its employees and meet its tax reporting obligations. The Directors need to keep themselves informed about the financial position of the company, prevent misconduct, ensure the company maintains financial records, and have regard to advice from ‘an appropriately qualified adviser’.
The Corporate Structuring Plan can be flexible but, if it is tested, it needs to meet certain criteria. Debts must be properly incurred to support the plan. The plan needs to be implemented within a reasonable timeframe, and it must be realistic and not fanciful.
The restructuring plan (Wexted call this a Corporate Structuring Plan) can include operational, financial and governance initiatives such as raising equity/debt capital to refinance/ deal with secured or unsecured debts; M&A initiatives such as sale of non-strategic assets or underperforming divisions; redundancy and cost cutting initiatives; and settlement of significant contingent liabilities.
The ’Course of Action’ is usually a restructuring plan. If that plan is implemented, and the plan is likely to lead to a better outcome for the company and creditors as a whole than an immediate administration, then the Directors will have a statutory defence to an insolvent trading claim made by a liquidator. As such, the Safe Harbour is designed to provide comfort that a plan can be implemented without insolvency risk, providing an incentive for restructuring.
Directors that successfully rely on the safe harbour defence will not be held personally liable for any debts incurred directly or indirectly in connection with a course of action developed to achieve a better outcome.
Safe Harbour means the insolvent trading provisions do not apply to a Director if, at a particular time after they suspect insolvency, the Director starts developing “courses of action” that are likely to lead to a “better outcome” for the company than the immediate appointment of an administrator or liquidator.
As Safe Harbour is a defence for the benefit of Directors, the Directors typically engage the Safe Harbour Advisor, but (as the Directors will have the benefit of an indemnity from the Company) costs are usually paid by the Company in question. The day to day engagement is usually with senior management.
Safe Harbour is a process that protects Directors. Directors use the Safe Harbour regime when a Company is experiencing financial distress or uncertainty, and they have started to suspect the company may become, or may be, insolvent.
The Safe Harbour legislation is set out in section 588GA of the Corporations Act 2001 (the Act) and was introduced in September 2017. It provides a Director ‘breathing space’ to formulate and implement a restructuring plan, preserving the business to avoid the need to enter into administration whilst protecting against personal liability from insolvent trading if the plan is unsuccessful.
Small Business Restructuring
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If the company fails to meet the plan's terms and the contravention cannot be rectified within 30 business days beginning on the day the contravention occurs, the plan will terminate, and all the debts will become due and payable immediately.
The company may need to consider other options, such as liquidation or voluntary administration. Creditors may take further action, such as winding up the company.
No, SBR is not available if the business is already in liquidation or has entered into a formal insolvency process.
Costs vary depending on the complexity of the case but are generally lower than voluntary administration. SBR costs can be paid from the business's assets and/or third-party contributions (e.g. from the directors).
Secured creditors are not allowed to enforce their security during the Restructuring Period without RP written consent or Court leave. They retain their rights to enforce their security after the restructuring.
Secured creditors are only included in the restructuring plan to the extent of the difference between their debt amount and the value of the collateral. They will be bound by the plan if it is accepted by majority of the voting creditors, even if the Secured Creditor did not participate in voting.
Personal guarantees are not automatically released through SBR. Creditors are prohibited from pursuing personal guarantees during the Restructuring Phase without Court leave, however, they may still enforce guarantees after, unless specifically agreed otherwise.
The company trades as usual under the control of its directors. Employee entitlements payable (e.g. weekly wages and leave taken) are paid in the ordinary course of business. Accrued entitlements are excluded from the SBR process, i.e. they are not going to be compromised through SBR.
Creditors are paid according to the terms of the restructuring plan, which may be a lump sum payment within a few weeks after acceptance of the plan, or by payment instalments over a period of up to three years.
Yes, the business can continue trading under the control of its directors during the SBR process. However, the company cannot declare a dividend or dispose of its assets outside the ordinary course of business without the SBRP’s consent.
If the plan is rejected, the SBR will end. The company may need to consider other options, such as liquidation or voluntary administration.
The plan usually proposes to settle the debts owed to the affected creditors for in exchange for a certain cents in the dollar return, with the balance of those debts effectively written off after the effectuation of the plan, i.e. if the plan is accepted and effectuated, creditors at the commencement of the process will receive an agreed percentage of the amounts owed under the plan, with the balance of their claim written off..
We do note that creditors who hold personal guarantees may still be entitled to pursue guarantors (if any) for any shortfall.
A plan is deemed to be accepted by all affected creditors if the majority in value of the voting creditors accept the plan by the end of the Decision Period.
The Restructuring Phase usually takes 35 business days. The RP can extend the Proposal Period (i.e. the first 20 business days) by up to 10 business days on the company’s written request if the RP is satisfied that the extension is in the interest of the affected creditors.
The Plan Phase length depends on the plan accepted, which can range from a couple of days to up to three years.
The Restructuring Phase usually takes 35 business days. The RP can extend the Proposal Period (i.e. the first 20 business days) by up to 10 business days on the company’s written request if the RP is satisfied that the extension is in the interest of the affected creditors.
The Plan Phase length depends on the plan accepted, which can range from a couple of days to up to three years.
Yes, company tax debts can be included in the SBR, provided the company meets all eligibility requirements including its tax lodgements and employee entitlements payable (incl. SGC) both being up to date.
Most unsecured debts can be included in an SBR, such as trade creditors and tax debts (employee entitlements are excluded).
Secured debts (e.g. car finance or business loans) are only included to the extent of the difference between the debt amount and the value of the collateral (i.e. the shortfall calculated as the debt minus the secured asset value).
- Directors remain in control of the business.
- Lower costs compared to Voluntary Administrations or Liquidations where the business continues to trade.
- Potential to save the business and preserve jobs.
In SBR, the directors remain in control of the business during the restructuring process, whereas in Voluntary Administration or Liquidation, an external administrator takes control.
Board of directors must pass a resolution on the (likely) insolvency of the company and appoint a Small Business Restructuring Practitioner (SBRP or RP), the process involves two phases i) Restructuring Phase and ii) Plan Phase.
Restructuring Phase
During the Restructuring Phase, within the first five business days, the directors must submit a statement declaring the company’s eligibility for SBR (i.e. that it meets the criteria above). In the meantime, the company works with the SBRP to draft a proposal to creditors within 20 business days from appointment (Proposal Period). The proposal allows for a restructure of debts by way of a proposal for a “cents in the dollar return”.
The company must (1) have all its tax lodgements up to date and (2) have all employee entitlements due and payable (including Superannuation Guarantee Charge/SGC) paid up by the end of the Proposal Period / the time the proposal is sent to creditors
Creditors then will have 15 business days to review and vote on the proposal (Decision Period). Once accepted, the plan binds all affected creditors.
Plan Phase
If the proposal is accepted by the majority in value of the voting creditors, the plan is deemed to have been accepted by all affected creditors, hence, binding all affected creditors. The plan is made on the next business day after the Decision Period ends.
During the Plan Phase, the RP will collect and distribute funds to the affected creditors pursuant to the plan terms. Once the final distribution is made, the directors advise the RP of the effectuation of the plan and the company is relieved of all the compromised claims.
An SBRP assists the business in preparing a restructuring plan, liaises with creditors, collects and distributes to affected creditors under the plan terms, and ensures compliance with legal requirements. Unlike a liquidation or voluntary administration, the SBRP does not take control of the business which leaves the control of the business in the director’s hands and can reduce the costs of the process significantly.
To qualify for SBR, a company must:
- be an incorporated business (i.e. Pty Ltd entity);
- be insolvent or likely to become insolvent at some future time;
- have total liabilities (excluding employee entitlements) not exceeding $1 million;
- together with its related entities, not have adopted SBR or simplified liquidation in the last seven years.
Small Business Restructuring process (SBR) is a formal debt restructuring process introduced in January 2021. It allows eligible small businesses to restructure their debts with the help of a Small Business Restructuring Practitioner (SBRP or RP) while the business owners remain in control of their business during this process.