SAFE HARBOUR

Safe Harbour provides directors protection from personal liability for trading whilst insolvent.  Safe Harbour applies to directors of companies that are developing a restructuring plan that is reasonably likely to provide a better outcome for the company relative to the immediate appointment of an administrator or liquidator.

The Safe Harbour reforms seek to address a concern that the risk of personal liability for insolvent trading was causing directors to appoint external administrators prematurely, rather than to attempt a restructure of a viable business. The legislation seeks to strike a better balance between creditors’ interests and encouraging directors to manage challenging financial situations in a responsible and commercial fashion. The intention of the Safe Harbour reforms is to encourage proactive restructuring and entrepreneurship, and avoid formal insolvency processes, which can be needlessly destroy value.

Directors can access protections under Safe Harbour if they can demonstrate that they were developing or implementing a course of action reasonably likely to lead to a better outcome for the company than voluntary administration or liquidation.

In determining whether the above applies, Courts will have regard to whether a director is taking appropriate steps to:

• inform themselves of the company’s financial position;

• prevent misconduct by officers or employees;

• ensure the company is maintaining appropriate financial records;

• develop or implement a restructure plan; and 

• obtain advice from an appropriate qualified entity.
  
  
  
   

Key considerations when selecting an appropriately qualified entity include professional qualifications, independence, membership of an appropriate professional body and sufficient professional indemnity insurance to cover the advice being given. 

In line with guidance from the Australian Restructuring and Insolvency Turnaround Association we believe an appropriately qualified entity should be someone who can credibly test the Better Outcome against the counterfactual scenario – the appointment of an administrator or a liquidator.

The Safe Harbour regime contains a number of checks and balances to protect the interests of employees and promote compliance with tax reporting requirements. 

In order to benefit from Safe Harbour protections, directors must ensure that all employee entitlements have been paid to date; such as wages, superannuation, leave entitlements and retrenchment. 

Directors must also ensure the company has lodged all tax reporting documents, including activity statements, tax returns, fringe benefit returns, etc. The threshold does not require tax liabilities to be paid to date.

The directors should formulate and (importantly) document a plan that sets out a set of objectives that are comprehensive, milestone based, and time bound.  Examples of these objectives might include some or all of:

• Selling a business unit or non-core assets;

• Pivoting business model or strategy;

• Raising additional capital to repay liabilities or fund future expenditure; and

• Working with key creditors towards compromises in the form of deferrals or compromises of debts.

The plan should be continually refined as it is implemented and tested against the counterfactual (administration or liquidation scenarios) to ensure it satisfies the Better Outcome test.  The Better Outcome test is an objective, calculated measurement, undertaken by an ‘Appropriately Qualified Entity’, of the returns generated following the immediate appointment of an Administrator or Liquidator.

Protections under Safe Harbour only commence from the time that the directors start developing one of more courses of action, and one of those courses of action is reasonably likely to lead to a better outcome for the company than the immediate appointment of an Administrator or Liquidator.

Safe Harbour protections will continue to apply to a director until:

• the person fails to take a course of action within a reasonable period;

• the person ceases to take any such course of action;

• when the course of action ceases to be reasonably likely to lead to a better outcome for the company; or

• if an Administrator or Liquidator is appointed.

Accordingly, Safe Harbour may be available to a director for significant lengths of time, particularly if a course of action spans many months or years.