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.

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. 

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 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.

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.

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.

 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 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 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’.

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.