In response to Treasurer Frydenberg’s announcement in May of the government’s intentions to reform Australia’s insolvency framework as part of its Economic Recovery Plan, the Australian Restructuring Insolvency & Turnaround Association (ARITA) has now made a formal submission to the panel reviewing the insolvent trading safe harbour provisions.
On 3 May 2021, the Treasurer issued a press release announcing that the Federal Government would be pursuing further measures to improve Australia’s insolvency framework for small and large businesses.
Part of these measures would include a review of whether Australia’s insolvent trading safe harbour provisions, which were introduced in 2017, remain fit for purpose.
Treasury then released a consultation paper to seek feedback from stakeholders and on 5 October 2021, ARITA made a comprehensive submission based on significant market research into the effectiveness of the current safe harbour framework. It’s important to note that ARITA is the country’s leading association for restructuring, insolvency and turnaround professionals and its members are comprised of accountants, lawyers and other professionals involved in the industry.
Some key points of ARITA’s submission
Some of the key take-aways from ARITA’s submission are as follows:
- The safe harbour provisions are being used with some success, both as a form of business turnaround or restructuring and also as a defence against insolvent trading claims.
- Businesses that engage a safe harbour adviser have the confidence to continue to trade to achieve a better outcome for the business, its employees and its creditors.
- The availability of safe harbour makes a difference to directors of larger businesses.
- Insolvent trading laws have little impact on director behaviour in the SME space, due to Australia having some of the most complex insolvency legislation in the world, which at times is outside the scope of SME’s.
- There is a consensus among industry professionals that the safe harbour regime is not being abused by directors to avoid reasonable and fair personal liabilities. This is due in part to the burden of a better outcome the framework demands of directors.
- The pre-condition requirements consisting of keeping appropriate financial records and meeting taxation reporting obligations as a barrier to accessing the safe harbour framework help prevent it being used for illegal phoenix activity and stops inappropriate and unviable candidates for restructuring to continue to trade.
- The way the framework is currently written presents a lack of certainty around key terms such as ‘appropriately qualified entity’, ‘substantial compliance’ and ‘better outcome for the company’.
- There is a broad lack of awareness of both the existence of the safe harbour framework and how and when to implement a business plan under the framework. This is especially true within the SME space.
- The most significant factors that stop a safe harbour business plan from being effective are a lack of money and resources, and not starting the process until it’s too late.
Australia’s safe harbour framework
Australia’s safe harbour framework is legislated by Section 588GA of the Corporations Act 2001 (Commonwealth). The purpose of the Act is to abate the personal, legal and regulatory liabilities that directors face for operating a business while it is insolvent. This is known as insolvent trading.
The framework has been designed to provide companies the ‘breathing room’ to prepare a business turnaround or a business restructuring plan. During this time, the business must:
- Develop (and implement) a turnaround or restructuring plan in a timely manner.
- Only incur debts directly and indirectly related to the turnaround or restructuring plan.
- Continue to meet tax reporting obligations, however not necessarily payment.
- Continue to pay employee wages, including superannuation, and
- Continue to maintain appropriate financial records.
The Safe Harbour legislation places a burden on directors to prove that the turnaround or restructuring plan will reasonably, on a balance of probabilities, lead to a better outcome than the current course the business is on. Indicative factors that are considered include:
- Taking the appropriate actions to create and adopt a documented business plan that will improve the business’s financial position.
- The outcome to creditors if the business plan is successful.
- Maintaining complete and correct financial records and staying informed as to the business’s financial position, and
- Obtaining advice from an ‘appropriately qualified adviser’, such as a Liquidator.
If a business turnaround or restructuring plan is unsuccessful and the company subsequently enters liquidation, the directors must also assist the Liquidators with their investigations into the business’s affairs on an ongoing basis or lose the protections of the safe harbour framework.
If your business is experiencing distress, we can assist
At William Buck we have a long history assisting businesses develop, monitor and meet business turnaround and restructuring strategies. If your company is facing distress, please contact our qualified Restructuring and Insolvency advisors to assist.