As covered in previous posts, the new Safe Harbour provisions were enacted to encourage directors to seek professional assistance in the early stages of a company’s financial distress (or foreshadowed distress), so as to seek a better outcome. The words usually brought up when mentioning positive outcomes for a financially distressed company are “restructuring” and “turnaround”. But what do these terms mean, what does a restructure encompass, what do we have to go through to “turnaround” a company?
With the official start date of Amazon Australia's operations locally being today, the reported fears and apprehensions of Australian retailers over the past decade have now been realised. As the media have built-up talk of the negative impact upon retailers, having seen Amazon's effect upon similar businesses in the US and the UK, we look ahead to the likely benefits to retailers set-up as companies in Australia using the Safe Harbour provisions in the Corporations Act.
The Australian Restructuring Insolvency & Turnaround Association (ARITA) has released their one-page fact sheet on Safe Harbour for Company Directors, encouraging ARITA members to use this document for the promotion of their services.
Safe Harbour laws effectively provide protection to directors from insolvent trading liability if they pursue a plan that is reasonably likely to achieve a better outcome than an immediate appointment of an Administrator or Liquidator.
Directors cannot claim safe harbour if, at the time the debt was incurred:
In our opinion, the safe-harbour laws are best suited to circumstances where directors identify that their company is insolvent or likely to become insolvent at an early stage. This gives them the opportunity to develop a restructure plan that enables a director to rely on the safe harbour laws, in case the plan ultimately fails.
There is no restriction on a creditor to start recovery action against the company and director (if a personal guarantee was provided). This might include applying for the winding up of the company during safe harbour. As part of the restructure plan, the company shall be required to manage creditor claims to avoid such recovery actions.
While all directors may use safe harbour, it is more likely to be used by medium to large sized corporations.
Under the Australian Corporations Act 2001 (Cth) Legislation (s.588G) a director has a duty to prevent their company continuing to trade whilst insolvent (“insolvent trading”).
Directors who take up safe harbour will need to ensure that appropriate steps have been taken for the company to comply with its obligations. Here is a potential framework that could be used to document, implement and monitor the safe harbour process: