The Federal Government recently passed new laws that allow directors of financially distressed businesses a new ‘safe harbour’ to turn around their business free of the worry of being personally pursued for insolvent trading actions.
The ‘Safe Harbour’ is protection for company directors from liability for insolvent trading in the event that the company goes into liquidation.
The protection arises due to the steps that the directors’ take prior to liquidation as part of an attempted turnaround or restructure.
A director must take the following important steps to protect themselves as well as giving the business the best chance to return to profitability:
- get the company’s accounts and records in order
- get expert help
- put controls in place to prevent any misconduct by officers and employees that could reduce the company’s ability to pay its debts
- properly inform themselves of the company’s financial position and
- develop and implement a restructuring plan for the company
The safe harbour protection from liability for insolvent trading once a company is in liquidation is only available to directors who developed or took a course of action that, at the time, was reasonably likely to lead to a better outcome for the company than immediate administration or liquidation (the course of action that was developed must have been implemented within a reasonable period).
A director seeking to claim the benefit of the safe harbour bears the evidentiary burden of establishing that:
- he or she developed a course of action that was reasonably likely to lead to a better outcome for the company; and
- the debt was incurred directly or in connection with the course of action.
What does this mean for directors?
With the introduction of the Safe Harbour legislation, directors of companies that are insolvent or are likely to become insolvent now have a viable alternative to the immediate appointment of an administrator or a liquidator as a means to avoid personal liability for insolvent trading.
Safe Harbour protection, if applied correctly, gives directors the ability to trade their business through an unprofitable period. If they are ultimately unsuccessful in their rescue attempt and appoint an external administrator the directors may avoid personal liability for the trading losses during that period of insolvency.
The Safe Harbour legislation acts as an insurance policy for directors of distressed companies. Provided the directors ensure that the distressed company complies with the criteria for Safe Harbour the directors may avoid personal liability for insolvent trading.
In order to obtain the protection of the Safe Harbour legislation directors must:
- Appoint an appropriately qualified Safe Harbour advisor
- Provide sufficient information to the qualified Safe Harbour advisor to enable the advisor to provide appropriate advice
- Obtain advice and act on advice from the qualified Safe Harbour advisor
- Pay all employee entitlement obligations including superannuation contributions when they fall due
- Ensure all tax reporting obligations are complied with, including lodging notices, statements, applications or other documents required by taxation law on time
- Assess benchmark financial position to measure better outcome
- Develop a restructure plan to improve the company’s financial position
- Be properly informed about the company’s financial position
Ensure appropriate steps are being taken to prevent misconduct by officers and employees
- Ensure appropriate steps are being taken to keep and maintain appropriate financial records consistent with the size and nature of the company
- Implement restructuring plan intended to achieve better outcome for creditors
- Continually monitor restructuring plan against the benchmark
- In the case of listed companies, directors must also comply with continuous disclosure obligations (s674 Corps Act, ASX).
In the event that the restructuring plan fails, the directors will lose the benefit of the Safe Harbour protection unless they:
- continue to comply with formal obligations
- provide administrator or liquidator with immediate access to books and records
- Do not prevent administrator or liquidator from investigating the company’s activities
Appointment of a Safe Harbour Advisor
The William Buck Business Recovery team are well qualified to act as Safe Harbour Advisors to distressed companies. The William Buck Business Recovery team includes core restructuring advisors who have decades of experience in managing the affairs of businesses experiencing solvency pressures, are Registered Liquidators and include expertly qualified members of the Australian Restructuring Insolvency and Turnaround Association, who are suitably qualified to act as your Safe Harbour advisor.
Working with the Business Advisory team and the Corporate Advisory team, the Business Recovery team can also assist with the restructure at both a strategic and operational level.
Our restructuring advisors have been engaged by all sized businesses and across most industries to help clients protect themselves from insolvent trading exposure and to avoid the often perilous path of external administration and liquidation.
If you need any guidance or assistance with a corporate restructuring, insolvency or a personal bankruptcy matter, please contact one of the William Buck Business Recovery Specialists.