Safe Harbour -
Protection for Directors
Company directors taking steps to save their business without entering voluntary administration face two major risks: breach of their director duties, and personal liability for insolvent trading if their turnaround efforts aren’t successful.
However, since September 2017, if a director implements a plan to turnaround or restructure their business, they are now protected from these risks, and can avoid premature voluntary administration, under new ‘safe harbour’ law reforms.
How safe harbour protection works
These ‘safe harbour’ reforms, contained in the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017, include amendments to the insolvent trading provisions in the Corporations Act 2001.
Under the reforms, directors can now rely on a ‘safe harbour’ defence to avoid personal liability for a liquidator’s insolvent trading claim. Importantly, the defence is only available where a genuine turnaround attempt is being made and the company meets certain eligibility criteria.
Safe harbour protection commences as soon as you, as director, begin to develop one or more courses of action that are reasonably likely to lead to a better outcome for your company than the immediate appointment of a liquidator or administrator.
This is referred to as the ‘better outcome test’.
Accessing safe harbour protection
The required steps to access the safe harbour defence are:
- Develop and implement a course of action for a genuine turnaround.
- Satisfy the better outcome test at all times (see below).
- Comply with the eligibility criteria at all times (see below).
Safe harbour protection ceases if you:
- fail or cease to implement a course of action that has been developed,
- cease to meet the better outcome test or safe harbour eligibility criteria, or
- appoint a liquidator or administrator.
Satisfying the better outcome test
From the time a course of action is being developed, your company needs to continue to satisfy the better outcome test.
This means you believe the intended course of action is reasonably likely to lead to a better outcome for your company than immediately appointing an administrator or liquidator.
To work out whether this test is being satisfied, you must consider whether you are:
- properly informing yourself of the financial position of the company,
- taking appropriate steps to prevent misconduct by officers,
- taking appropriate steps to ensure the company is keeping proper financial records,
- seeking advice from an ‘appropriately qualified entity’, and
- developing or implementing a plan for restructuring the company.
Our experts can talk you through your situation and provide detailed advice.
Get in touch for a free consultation today.
Safe harbour eligibility criteria
In addition to undertaking a genuine turnaround plan, certain eligibility criteria must be met for the defence to be available:
- Employee entitlements and superannuation must be paid.
- ATO returns must be lodged on time.
Appropriately qualified entities
Limited guidance is available to assist directors to determine who is an ‘appropriately qualified entity’. It’s therefore up to you to assess the quality of an advisor which include:
- registered liquidators, and
- suitably qualified and experienced turnaround professionals, including experienced lawyers and accountants.
What safe harbour does not cover?
Safe harbour does not do the following:
- Avoid personal liability for directors under personal guarantees or an ATO director penalty notice if your turnaround is unsuccessful.
- Provide a specific defence to criminal liability for insolvent trading or other types of liquidator claims, such as for breaching directors duties. However, directors causing their company to comply with the safe harbour eligibility criteria are also likely complying with their duties in circumstances where their company may be insolvent.
- Provide a defence to an insolvent trading claim for debts incurred before safe harbour begins. If your company has traded while insolvent before implementation, you may be personally liable for those debts.
The right time to access safe harbour
Safe harbour doesn’t prevent other challenges your struggling business may face such as tight cashflow, lack of supplier support following non-payment, or legal action by creditors such as the Australian Taxation Office.
Seeking help early prevents problems becoming urgent and gives your business the best chance of survival. Waiting too long can mean your business has limited options or, worse still, becomes insolvent and no longer viable.
If you would like to further understand the risks of insolvent trading and how to access safe harbour, contact us for a free confidential discussion on 1800 861 247.