An incentive to Restructure: Safe Harbour protection for Directors

14 September 2017

What is Safe Harbour?

The Federal Government has released draft legislation designed to reform Australia’s insolvency laws and to encourage entrepreneurship by introducing a ‘Safe Harbour’ for Directors. The Safe Harbour provides protection from insolvent trading liability for honest and diligent Directors who identify that their company is or may become insolvent but who attempt to restructure and trade out of their difficulties.

To seek protection of the Safe Harbour, a Director needs to be able to prove their actions were “reasonably likely” to result in a better outcome for the company and its creditors, than placing the company straight into Administration or Liquidation.  What constitutes “reasonably likely” will vary from company to company.

If the company is ultimately wound up, the Director would be protected from liability for insolvent trading under Section 588G of the Corporations Act.

Implication of Safe Harbour for Directors

The Safe Harbour provisions give Directors the opportunity and incentive to attempt to restructure and save their business without the fear of becoming liable for insolvent trading.

To take advantage of the protection of the Safe Harbour, Directors need to be aware of the following factors that may be taken into account in determining whether a course of action is reasonably likely to result in a better outcome, including whether the Directors:

  • Take prompt and proactive action;
  • Seek appropriate professional advice where required;
  •  Ensure the company has maintained adequate books and records;
  • Ensure adequate provision has been made for employee entitlements;
  • Take steps to prevent any misconduct by officers or employees that could result in the company being unable to pay its debts;
  • Complied with all taxation reporting requirements;
  • Keep informed about the company’s financial position;  and 
  • Develop and closely monitor a restructuring plan and make adjustments as required to ensure it continues to be “reasonably likely” that the course of action being undertaken will provide a better outcome than if the company were immediately placed into administration or liquidation;
  • Adequately assess each time a debt is incurred that it is reasonably likely that by incurring the debt it will result in a better outcome for the company (and creditors): Only debts incurred in connection with meeting the restructuring plan are covered by the safe harbour.

The Safe Harbour defence will cease to be available to a Director when:

  • The Director stops taking the course of action;
  • The course of action is no longer “reasonably likely” to lead to a better outcome;
  • The company is placed into Administration or Liquidation;
  • The company has failed to meet its employee entitlement and tax reporting obligations;
  • The Directors fail to provide an appointed Administrator or Liquidator with company books and records when requested.

Action

If your company is experiencing financial difficulty and you suspect it is, or may become insolvent, it is imperative to act promptly and obtain professional advice to determine if you can restructure the company and to take advantage of the protection of the safe harbour provisions.  Contact Rodgers Reidy for a confidential discussion and advice for your specific circumstances.  Rodgers Reidy are experienced insolvency practitioners who can provide you with guidance to assess your options to obtain the best possible outcome for your business and take advantage of the safe harbour protection.

Further resources:-

1.       ASIC Information Sheet 42 – Insolvency: a guide for directors

2.       ASIC: Insolvency Law Reform Act 2016

 

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