THE RISE OF SAFE HARBOUR PROTECTION BEFORE A SMALL BUSINESS RESTRUCTURE

Under an SBR process (regulation 5.3B.18), a practitioner is required to consider, opine on a restructuring plan to compromise creditor claims and make a declaration amongst other things, of the likelihood of discharging obligations under the plan, before the plan is issued to creditors for consideration.  As part of the counterfactual analysis required to be undertaken by the practitioner, the plan is usually compared to a potential external administration process (i.e. a liquidation scenario).

In our experience, the ATO is generally the largest creditor in the company, and the tax debts have been built up over a number of months, and in some cases years.  As part of the counterfactual assessment of potential returns in a liquidation scenario, a practitioner will consider any potential recoveries available in a liquidation scenario.  This includes potential insolvent trading claims against the director, where the director may have continued trading the business whilst insolvent.  

In the event a director claims protection from insolvent trading claims, using the safe harbour defence, the merits of any potential defence may be considered by the restructuring practitioner in their assessment of the potential recoveries of any insolvent trading claim in a liquidation scenario.  

As outlined in the December 2024 ASIC Guide for Directors, Regulatory Guide 217 Duty to prevent insolvent trading, as soon as there are reasonable grounds to suspect that the company is in financial difficulty, a director should consider obtaining advice (RG217.53).  At RG217.101, failure to obtain such advice may impact the ability of the director to rely on safe harbour protection. 

While ASIC recommend a director ‘should’ obtain advice from an appropriate qualified entity, there is no legislative requirement that a director ‘must’ obtain advice and still be afforded protection of safe harbour.  While self-serving as an appropriate qualified entity (AQE), it is our view that obtaining advice from lawyers and or insolvency practitioners, will increase the prospects of protection being available to directors under the safe harbour legislation.  In the absence of a test case, we have seen directors not obtaining advice and seeking to claim safe harbour protection.  

In consideration of the above, a restructuring practitioner assessing the potential recoveries in a liquidation scenario may form the view (based on evidence provided in each unique matter) that the safe harbour protection may be an available defence, and reduce the potential recovery of a potential insolvent trading claim in the hypothetical liquidation scenario accordingly.  

THE WEXTED VIEW

When undertaking Safe Harbour prior to a Small Business Restructure:

• In accordance with ASIC RG217, we recommend directors obtain appropriate advice.
• Where directors do not seek advice, the Court may look unfavourable on the director(s) seeking protection against insolvent trading under the safe harbour legislation.
• Where a Corporate Structuring Plan (CSP), under safe harbour, includes a course of action that involves an SBR – the directors will need to document and form the view that the CSP is reasonable and realistic.  Due to the timing of the safe harbour being pre-SBR, this may be a challenging assumption for the directors to form this view, without specific advice from a restructuring practitioner.  
• The ATO as the major creditor, and their current views towards SBR proposals which do not meet their requirements, will also need to be considered by directors in forming the view as to whether their CSP is reasonable.  
• A safe harbour pre-SBR is possible and may provide a better outcome to stakeholders than an immediate external administration (i.e. liquidation), we recommend directors obtain appropriate advice.
• While there is no legislation or guidance preventing an Insolvency Practitioner acting as an Appropriately Qualified Entity to provide safe harbour advice, then acting as the Restructuring Practitioner of an SBR, it is recommended when making the declaration on the plan to take a conservative view on whether safe harbour protection is available.