NEWS & INSIGHTS

Spotlight on Safe Harbour - Asic tighten up regulatory guidance

Following the Safe Harbour Panel Review, ASIC has now provided “Plain English” regulatory guidance in relation to aspects of Safe Harbour, that will be of help to both Advisors and Directors.

The story so far

The Safe Harbour Review Panel (considered in depth in our article SAFE HARBOUR – IS IT FIT FOR PURPOSE?) concluded as one of its recommendations, that a ‘Plain English ‘best practice guide’ to Safe Harbour be developed with industry groups. To address the recommendation ASIC issued a Consultation Paper CP372 and draft update to Regulatory Guide 217 Consultation Paper CP 372 Guidance on insolvent trading safe harbour provisions: Update to RG 217.

The next chapter - RG 217 Released

In December 2024 ASIC released Regulatory Guide RG 217 Duty to prevent insolvent trading: Guide for directors The changes to RG217 are significant and a positive step in prescribing clear and strong guidance to Safe Harbour. The major changes include:

A new Section C (RG217.73 to RG217.116) specifically addressing Safe Harbour;
Addition of a new Table 3 in Section D (being Factors ASIC will take into account, in establishing Safe Harbour protection). ASIC GUIDANCE ON SAFE HARBOUR – SOME ADDITIONS IN SECTION C Some of the more commercial additions and observations to the new section of RG217 include:

ASIC Guidance on Safe Harbour - Key Additions in Section C

Some of the more commercial additions and observations to the new section of RG217 include:

Observation	Detail
Developing a Course of Action \| RG217.80 onwards	A course of action could include some or all of the following aspects: undertaking a business review undertaking capital raising or a debt-for-equity swap; executing a plan to compromise or restructure debt facilities; addressing operational issues that are negatively affecting the financial position of the company; implementing cost-saving initiatives; negotiating or compromising key creditor claims or building support for a restructuring plan with key creditors and stakeholders; renegotiating better supplier terms or standstill agreements while refinancing is achieved; preparing for the subsequent appointment of a registered liquidator to implement a company restructure through a form of external administration; if eligible, preparing for the appointment of a small business restructuring practitioner (see RG 217.114); and sale of the company’s non-core or even core business, in appropriate circumstances.
What is a Better Outcome? RG217.84 onwards	What is a better outcome will vary depending on the company’s circumstances at the time the course or courses of action are developed, and the decision is made. This includes matters such as the size and financial position of the company, the industry in which the company operates and the complexity of issues affecting the company’s viability. Developing one or more courses of action requires considered and meaningful analysis based on accurate, reliable information, and in most cases will include advice from an appropriately qualified entity. The director should proactively consider and continuously assess the courses of action, and evaluate whether the courses of action are reasonably likely to lead to a better outcome. The directors should revise the course(s) of action if, for example, there is new information or if unexpected issues arise.
Example of obtaining, updating and monitoring a Course of Action \| RG217.87	In Example 8, the accounting firm produces financial forecast models showing expected future profit and loss, asset and liability positions and cash flows from continuing to trade the business under the assumptions in each course of action. The accounting firm also provides an estimate of an immediate liquidation, including expected liquidation asset sale values, debtor collections (noting contracts may not be completed) and expected liabilities, including estimates of possible damages for not completing contracts. They estimate the priority costs of a liquidation process, including the liquidator’s remuneration and possible legal costs.
Meaning of ‘Reasonably Likely’ \| RG217.89 onwards	A course of action is reasonably likely to lead to a better outcome if based on relevant and accurate information, is developed using good judgement, and is objectively reasonable in the company’s circumstances. Paragraph 1.52 of the Explanatory Memorandum emphasises that: The phrase “reasonably likely” does not require a better than 50 per cent chance of a better outcome than the immediate appointment of an administrator or liquidator. “Reasonably likely” here requires that there is a chance of achieving a better outcome that is not fanciful or remote, but is “fair”, “sufficient” or “worth noting”.
Practical examples of courses of action and their likely outcomes \| RG217.85 onwards	Actions reasonably likely to lead to a better outcome Undertaking a restructure Undertaking the sale of assets Ceasing the incurrence of debts Restructuring of debt facilities Negotiating key creditor claims Reducing expenses Appointing an experienced director or directors Undertaking a business review Actions not reasonably likely to lead to a better outcome Ignoring expert advice Significantly and unsustainably discounting stock Continuing to trade as usual Drawing down on bank facilities, knowing that the funds drawn cannot be repaid in full Ordering more stock from creditors, knowing that the debt cannot be repaid in full
Obtaining Appropriate Advice from an appropriately qualified entity \| RG217.101 onwards	The appropriately qualified entity should be suitably qualified, adequately insured, competent and reliable. A director should provide the advising entity with complete, current and relevant information. Any cash flow projections or other financial details supplied by the director should be objectively reasonable, to ensure that appropriate advice is received. Factors to consider in whether the advising entity is appropriately qualified: the nature, size and complexity of the company’s business; the qualifications and professional memberships (including whether they are a member of good standing of relevant professional bodies and associations) of those providing the advice; the entity’s relevant industry experience; the entity’s access to resources for undertaking the assignment effectively and efficiently; and whether the appropriately qualified entity maintains adequate professional indemnity insurance for the type of advice being sought. The director should consider whether it is necessary to engage multiple appropriately qualified entities who together have the necessary accounting, legal, financial and industry-specific knowledge and expertise. An appropriately qualified entity may be one of those professional advisers discussed at RG 217.59, being a Registered Liquidator, Lawyer or Accountant, or firms including those professional advisers.
A director's evidentiary burden to establish protection \| RG217.108 onwards	A director who wishes to rely on the safe harbour protection in relation to a debt bears the onus of pointing to evidence that suggests a reasonable possibility of a Better Outcome. The evidence required to establish Safe Harbour will need to consist of more than a mere statement that the company developed or undertook a course of action that was reasonably likely to lead to a better outcome for the company. Table 3 below sets out some of the specific factors ASIC will take into account in assessing whether a director can rely on safe harbour protection, and the evidentiary material ASIC will look for.

Relevant Factors

The Revised RG217 also includes (at Page 39) a table (Table 3) setting out the factors ASIC consider relevant from an evidentiary standpoint, in establishing Safe Harbour. This includes:

Factors ASIC take into account	Evidentiary method ASIC look for
Whether the director developed an alternative course of action reasonably likely to result in a better outcome	A documented and well-developed plan for an alternative course of action setting out the director’s rationale as to better outcome; Evidence of whether the director continued to assess the merits of the alternative course of action on an ongoing basis; Materials that verify that the alternative course of action was in fact implemented by the director as planned; Evidence of whether the director has properly informed themselves as to the company’s financial position, taken steps to prevent misconduct by officers and employees, and maintained appropriate financial records.
Whether the director obtained advice from an appropriately qualified entity	Any advice received from advisers appointed to the company; Whether the adviser was appropriately qualified to provide the advice; The accuracy and reasonableness of the information, assumptions and instructions provided to the adviser; Evidence of whether the professional advice was followed by the director.
Whether debts incurred by the company were incurred directly or indirectly in connection with the alternative course of action	The company’s financial and other internal records to confirm the nature of the debts incurred during the time the alternative course of action was being implemented.
Whether any of the factors preventing safe harbour protection are present	The company’s records to confirm whether employee entitlements were being paid when they fell due; and the company gave all returns, notices, statements, applications or other documents as required by taxation laws. ASIC will also seek verification from the company’s receiver, administrator and/or liquidator that the director complied with his or her obligations to provide assistance to the receiver, administrator and/or liquidators after their appointment.

Subscribe to Wexted's Turnaround Podcast for more information on Safe Harbour

In our latest Podcast, Wexted's Joe Hayes and Andrew McCabe, together with Michael Catchpoole from Corrs, discuss the good, the bad and the nail-biting aspects of Safe Harbour.

Learn More

What does the ASIC guidance tell us?

We can draw the following conclusions from the new RG217:

Conclusion	Detail
Developing a Course of Action	ASIC have provided a series of helpful and prescriptive activities and matters that a Course of Action should include
What is a Better Outcome?	The company’s circumstances and size, industry and complexity are relevant to a Better Outcome, the information used should be objectively accurate, and the outcome should be continuously assessed
Preparing and monitoring a Course of Action	An AQE should prepare both a forecast model for trading the business pursuant to the course of action, and a detailed and financially complete (rather than a narrative) liquidation plan including specific elements
Meaning of Reasonably Likely	Does not require a better than 50% chance, but means fair, sufficient and worth noting ASIC have provided clear and practical examples of reasonable actions and unreasonable actions
Appropriately qualified entities	Factors such as industry experience, resources and access to insurance are relevant, the need for multiple AQE’s should be considered, and registered liquidators, lawyers and accountants can all be AQE’s
Evidentiary burden	Requires more than a mere statement: ASIC have provided a clear evidentiary method that places clear reliance on company financial and internal records, and evidence that advice was followed

All these factors continue to support a fulsome approach to Safe Harbour appointments, the involvement of specialists, and the preparation of an objective and financially complete counterfactual analysis.