SAFE HARBOUR - HOW DOES IT WORK?

What is Safe Harbour?

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.

When does a company use Safe Harbour?

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. 

Who engages the safe harbour Advisor

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. 

What does Safe Harbour do?

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.

What does it protect?

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.

What does ‘Course of Action’ actually mean

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.

What sort of things are in a restructuring plan?

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.

What does the Plan need to look like?

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. 

Are there conditions to obtaining the protection?

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’.

What is an appropriately qualified advisor?

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.

Who is in charge during a Safe Harbour period?

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. 

What does Better Outcome actually mean?

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. 

When does safe harbour protection commence?

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. 

Does it apply retrospectively?

No.  A Director will need to be able to demonstrate that, from a particular and specific time, they are developing a course of action. 

Do I need to tell anyone I am in Safe Harbour

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.

Is Safe Harbour a form of insolvency? 

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. 

Am I ‘eligible’ for Safe Harbour?

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.

I can write the plan, so what does the Advisor do? 

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.

Are Safe Harbour roles significant appointments?

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. 

What is the downside to entering Safe Harbour?

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.

Does the Advisor liaise with stakeholders?

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.

How long can I ‘be in’ Safe Harbour?

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. 

How do I meet the ‘burden of proof’ that I in Safe Harbour?

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. 

What if the process fails and an Administrator is appointed?

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. 

What kind of companies does Safe Harbour suit? 

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.  

What are some of the enduring benefits of 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.