NEWS & INSIGHTS
SAFE HARBOUR – IS IT FIT FOR PURPOSE?
The recommendations from the Government’s Review of the Insolvent Trading Safe Harbour in late 2021 are – finally - now partly implemented. Safe Harbour is getting regular use, and gets a tick of approval, with refinement needed. But what exactly has happened, and how will reforms improve the legislation?
The story so far
The Safe Harbour was established by a Treasury Laws Amendment Act in 2017. It provides protection for company directors from personal liability for insolvent trading if a company is trying to restructure. The intention is to encourage directors to seek advice early to save financially distressed but viable companies, rather than initiating insolvency to avoid personal liability, thereby supporting a culture of entrepreneurship and innovation.
The Wexted Experience
Since the introduction of the Safe Harbour legislation seven years ago, Wexted Advisors have enjoyed a strong, visible and market leading position. Our case studies point to several consistent features:
- Our experiences are at the larger private and ASX listed end of the restructuring spectrum;
- Our clients are informed decision makers, have multiple stakeholder interests, and manage complex business operations;
- Restructuring solutions have largely required access to the capital markets, so the courses of action have been, in one sense, quite public;
- Maintaining a material equity base has formed the backbone of our assessment – if a stock can remain viably quoted and appropriately funded, that is the best way to protect other creditors.
Many of the businesses we have worked in, would have entered voluntary administration but for the legislation. In fact, in several cases we have seen increments in shareholder value following the Safe Harbour – largely because the business has been given the scope to focus on core business, once the Safe Harbour crisis was dealt with.
The 2021 Enquiry
In late 2021, the Federal Government announced an independent Review into Safe Harbour, to ensure that “the safe harbour provisions remain fit for purpose and its benefits can extend to as many businesses as possible”. To support this commitment, an independent panel chaired by Ms Genevieve Sexton, with Ms Leanne Chesser and Mr Stephen Parbery as panel members, was appointed to undertake the Review.
What did Wexted suggest?
Wexted (along with many other organisations) made a Submission to the Enquiry. Wexted concluded the Safe Harbour Law is a welcome addition, legitimising informal restructuring processes.
We did not think there should be any material change to the Law and further codification should not be a priority. We thought director and industry education, practical guidance on use and peak body support were the most important issues to increase usage.
What did the Review Panel say?
The Review Report covered issues of context, general awareness, impact on stakeholders, legislative considerations, and bespoke and wholistic reform. It concluded that:
- Safe Harbour offers considerable assistance in encouraging an active turnaround market, particularly for larger companies;
- The Panel held concerns as to the relevance and applicability to the SME market;
- The need for ongoing education and guidance to support the operation and promote awareness was endorsed; and
- Consideration should be given to a holistic review of Australia’s insolvency regime, as more than 30 years have passed since the release of the last comprehensive review.
Specific recommendations
The Review ultimately made 14 recommendations. The focus was on the wording of the provisions. Of the recommendations, four (4) have been recently implemented by the Treasury Laws Amendment Act 2024 passed into Law on 9 July 2024, and another partly implemented by the issue of a revised draft of ASIC Regulatory Guide 217. These recommendations are paraphrased for simplicity below:
| No. | Issue | Proposal | Response | Summary of Government Comments |
| 1 | Is suspicion of insolvency too prescriptive? | Reference to suspicion of ‘’financial distress” as well as suspicion of “insolvency”. | Agreed | Solvency requires complex analysis whereas financial distress is more easily understood. |
| 2 | Do obligations to protect employee entitlements defeat the Better Outcome test? | Safe harbour protections to extend to obligations under section 596AC (i.e. transactions that avoid employee entitlements). | Noted | The Government will undertake further consultation. |
| 3 | Should debts incurred be in in the ordinary course of business? | s588GA(1)(b) be amended to specifically refer to debts incurred in the ordinary course of business. | Agreed and implemented | Law updated. |
| 4 | Is there enough practical guidance? | Given a lack of awareness and understanding of a director’s duty to prevent insolvent trading (and the related safe harbour provisions), a Plain English ‘best practice guide’ to safe harbour be developed with industry groups. | Agreed and partly implemented | ASIC have issued CP372 and a new draft RG217. |
| 5 | When can a director rely on books and records? | s588GB be amended so that if books and records are not provided to the VA or liquidator at appointment, the director will be prevented from producing those books and records to establish safe harbour at a later time. | Agreed | Will make the section consistent with the director’s obligations under other provisions of the Act. |
| 6 | Does the use of the term restructuring cause confusion with the SBR legislation? | The definition of ‘restructuring’ in s9 is to exclude its use in s588GA(2)(e). | Agreed and implemented | Avoid confusion with existing definition in section 9, as restructuring under the small business restructuring regime. |
| 7 | Can the Safe Harbour have more than one appropriately qualified advisor? | s588GA(2)(d) be amended by replacing the reference to ‘an appropriately qualified entity’ with ‘one or more appropriately qualified advisers’. | Agreed | Will clarify that the advice can come from more than one adviser. |
| 8 | Is the Company also receiving advice, alongside the Directors? | s588GA(2)(d) be amended to state that regard may also be had as to whether the company (as well as the person) is receiving advice from appropriately qualified advisers. | Agreed and implemented | Covers situations where the company has sought the appropriate advice, reflecting the commercial reality as to who is likely to seek the advice. |
| 9 | Is there clarity around the employee payment exclusions? | 588GA(4)(a)(i) be amended to align the wording with Regulation 5.3B.24 (entitlements that are payable, rather than entitlements that fall due). | Agreed and implemented | Consistency in the reference to payment of employee entitlements with the wording used in the SBR legislation is desirable. |
| 10 | Are the tax reporting obligations sufficiently clear? | s588GA(4)(a)(ii) be amended to include a finite list of tax reporting obligations. | Noted | Government will consider the inclusion of tax reporting guidance for directors in draft RG217. |
| 11 | Is the tax compliance provision too prescriptive? | s588GA(4)(b)(ii) be deleted to remove references to the number of failures to comply. | Agreed | This will allow a wholly principles based approach to ensuring compliance under subsection 588GA(4). |
| 12 | Should the meaning of substantial compliance be clearer | A definition of substantial compliance be included, to assist interpret the tax requirements of subsection 588GA(4). | Noted | The Government will progress reforms to clarify that substantial compliance is meeting tax lodgments as a whole. |
| 13 | Is there enough data on Safe Harbour usage | Data on safe harbour utilisation be collected and reported upon, as part of the reports received from voluntary administrators and liquidators. | Noted | The Government has progressed reforms to enhance the ability of regulators to collect business-related data to support law and policy as part of the Modernising Business Registers program. |
| 14 | Should there be a Review of Insolvency Law Generally | The Review recommends that Treasury commission a holistic in-depth review of Australia’s insolvency laws. | Noted | On 12 July 2023 the Parliamentary Joint Committee on Corporations and Financial Services released its Report into corporate insolvency in Australia recommending further review. |
Useful links
A great initiative to navigate difficult times
Seemingly, ground is finally now being made in the refinement of the Safe Harbour Law consistent with the findings of the Panel. For some time, Government had concerns about the extent of failure where business had not taken genuine, early and meaningful remediation steps. The duty on directors to prevent insolvency were prescriptive, even repressive and encourage liquidation as a panacea to insolvent trading liability – the result is directors can jump to that conclusion too quickly and for the wrong reasons. In our experience Safe Harbour is addressing this challenge to good effect.
Our submission indicated Business will require the confidence to continue to trade though strong headwinds, in a likely ambiguous environment. Governments would and should be keen to avoid significant insolvency events impacting on employment and growth. A clear pathway for distressed business to take appropriate steps towards recovery, without resorting to insolvency, has become an important step in that the broader economic debate.
Report into Corporate Insolvency – what’s next?
On 12 July 2023, the Federal Government's Parliamentary Joint Committee on Corporations and Financial Services released its Report into corporate insolvency in Australia. The Report made 28 recommendations in total which can be divided into recommendations that support a comprehensive and independent review as well as low hanging fruit.
The Report has shown that a substantive and comprehensive reform is generally desired. We will report on this process in a later update.
Published 28th October 2024
