Have directors-ships pulled into the harbour?
In September 2017, the safe harbour law came into effect. At a broad economic level it aims to encourage an entrepreneurial and innovative environment. More specifically, the laws seek to provide directors an opportunity to explore restructuring opportunities where previously, stringent insolvent trading laws may have made it prohibitive.
So, what’s the benefit to directors from an insolvency point of view?
Directors can seek protection from an insolvent trading claim, which can crystallise under a liquidation. Safe harbour is available when directors suspect that their company is or likely to be insolvent, and they develop at least one course of action that is reasonably likely to lead to a ‘better outcome’. That outcome is defined as ‘better’ than the immediate appointment of an administrator, or liquidator, to the company.
To assess a better outcome, directors must:
- keep themselves informed about the company’s financial position
- take steps to prevent company officers’ and employees’ misconduct
- take appropriate steps to ensure the company maintained appropriate financial records
- obtain advice from an appropriately qualified adviser
- develop or implement a plan for restructuring the company to improve its financial position.
Critically, directors are only protected from personal liability for those debts incurred directly or indirectly regarding any such course of action. Protection ends if the director fails to act within a ‘reasonable period’, ceases course of action, or an administrator or liquidator is appointed. The Explanatory Memorandum[1] notes that the ‘reasonable period’ will vary case-by-case and that for a small business—it may only be days.
Directors cannot take advantage of safe harbour if the debt is incurred when:
- They do not pay employee entitlements when due.
- They breach their ongoing lodgement requirements with the Australian Taxation Office (ATO).
- They fail to provide the Report as to Affairs and books and records to a voluntary administrator or liquidator.
So, almost two years on, have directors actively sought safe harbour protection?
We have heard of successful turnarounds while utilising safe harbour protection; in particular, those companies with multi-level financiers and larger private equity businesses. However, the continuing challenge appears to be—particularly in the SME market—around two fronts:
- Companies not meeting the criteria due to unpaid superannuation or non-lodgement of tax requirements.
- Directors not seeking professional advice from their advisors early enough for safe harbour to be viable.
The government did state that it would review the safe harbour legislations two years from its commencement. With the government currently dealing with several other reforms relating to the insolvency industry, it is difficult to see that the review would occur within the period stipulated. Nonetheless, more specific guidance around interpreting the legislation, in particular, defining ‘an appropriately qualified adviser’ would provide clarity to better promote the initiative.
Despite any use and success of restructuring plans, have these laws changed director culture and attitude?
It is a little too early to say given the law’s infancy compared to other long-standing legislation. What is apparent though is the lack of director education on the benefits safe harbour can give to company survival, or at least its business in some shape or form. Opportunity for further education remains through relevant industry bodies, if not to drive entrepreneurialism and innovation, to at least change directors’ attitude to ensure they feel comfortable in approaching their advisors (at an early enough stage) to respond to financial issues.
Potentially, if safe harbour protection is not viable, a formal insolvency solution could result in a better outcome for all stakeholders, including the director.
Your local Worrells partner is available as confidential and complimentary to discuss any financial challenges your clients may be experiencing. For all the Q&As on how the safe harbour regime works, download our complimentary 2019/20 Guide to Corporate Insolvency, click here.
[1] Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017
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