If economic uncertainty is impacting your business to the point where you’re unsure if it will continue to be financially viable, you should consider engaging a safe harbour advisor. A safe harbour advisor can assist you to better understand your company’s financial position and serve as a shield to protect you from being personally liable for your company’s debts.
What is the safe harbour defence?
Safe harbour provides directors with protection from personal liability for trading while insolvent if they are undertaking a course of action that is reasonably likely to result in a better outcome than immediate external administration. Put simply, if the director is acting in good faith with a sensible and documented plan, they are absolved from the loss suffered by creditors if the plan fails.
When considering entering safe harbour, the first step is to determine whether your company is eligible. As qualified safe harbour advisors, we work with businesses to review their current circumstances and provide assurance regarding eligibility.
Eligibility is based on the principles of good governance. The following questions should be considered when assessing eligibility:
- Is the director properly informing themselves about the company’s financial position?
- Is the director taking appropriate steps to prevent any misconduct by officers or employees of the company that could adversely affect the company’s ability to fulfill its debt obligations?
- Is the director taking appropriate steps to ensure that the company is keeping financial records consistent with the size and nature of the company?
- Is the director seeking advice from a suitably qualified person that has been provided sufficient information to offer appropriate advice?
- Is the director developing or implementing a plan for restructuring the company to improve its financial position?
In addition to the above, the director must ensure:
- Employee entitlements, including superannuation, have been kept up to date over the last 12 months and will continue to be paid as and when they fall due, and
- Tax reporting lodgement obligations have been consistently met and kept up to date for the past 12 months.
The eligibility assessment is not a one-time process. Rolling assessments are undertaken to ensure the director can continuously justify his or her reasonable belief that a better outcome for the company can be achieved through the implemented plan.
By eliminating the potential exposure to personal liability, we help the directors to focus on the plan. Safe harbour operates as a behind the scenes restructuring process and is not formally advertised. It does not appear on the ASIC register nor affect the credit score of a company or its directors.
Safe harbour example
A business is facing cash flow issues, with rent in arrears (director personally guaranteed) and creditors increasingly chasing payment.
Employee entitlements and taxation lodgments have been paid in a timely manner and kept up to date over the past 12 months.
The business has obtained funds from its bank which are secured by the personal home of the director, with equity in the home.
The company balance sheet indicates that total assets can meet total liabilities, however, this would require all assets to be sold.
Potential restructuring plan
The company appoints a qualified safe harbour advisor who determines that the company is eligible for the defence and develops a turnaround plan to:
- Sell the business as going concern with a new tenant to be secured to achieve full value for goodwill and remaining assets.
- Reduce exposure to liabilities the director has personally guaranteed which includes rent and bank debt.
- Engage with key stakeholders, demonstrating ambition to seek a sale of the business as a going concern and provide a three-month anticipated timeframe with key stages listed.
- Provide the bank monthly reporting, and
- Seek deference from creditors for debts currently due based on a proposal that their debt will be paid in full upon the completion of a sale of the business as a going concern. The timing for the completion of the sale can be specified in the proposal.
Achieving a better outcome
The following table demonstrates that the safe harbour appointment would achieve a better outcome compared to immediately appointing an administrator or liquidator.
|Key Considerations||Safe Habour||Voluntary Administration/Liquidation|
|Sale of Business||Retains value of the company when being sold as a going concern||May adversely impact the value of a company when being sold as a going concern|
|Debtors||100% value||Reduced collectability|
|Goodwill||Retains value||Little to no value|
|Plant and Equipment||Market value||Auction value|
|Leasehold Improvements||Market value||Little to no value|
|Landlord Lease||Assigned to new tenant||May be terminated with associated termination costs added to the pool of creditors|
|Cost of Process||Lower||Higher, due to higher compliance requirements|
|Return to Creditors||Higher||Lower|
|Ongoing trade with suppliers||Would remain||May be lost should a restructure not occur|
|Shareholders||A better chance to pay creditors in full, allowing equity to be returned to shareholders||No return|
William Buck Restructuring and Insolvency are qualified to act as safe harbour advisors to distressed companies. If your business is facing financial distress and you’re looking to explore restructuring options, contact your local William Buck Restructuring and Insolvency advisor.