Harbour Masters - safe harbour & restructuring blog

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Directors' governance prerequisites

26-Oct-2017 17:06:55 / by Stefan Dopking

Directors cannot claim safe harbour if, at the time the debt was incurred:

  1. employee entitlements (including superannuation) were not paid when they were due; and/or
  2. the company breached their obligations to give returns, notices, statements, applications and other documents required by taxation laws.

Their failure to meet these requirements:

  • amounts to less than substantial compliance; or
  • has occurred two or more times during the previous 12 months.

Currently, it is unclear what is required to achieve substantial compliance and what constitutes two or more failures. These are both undefined terms and open to interpretation. No doubt, they will be tested in the courts in future.

While a director must ensure all employee entitlements are paid as they fall due to meet the governance prerequisites of a safe harbour claim, they are only required to ensure all taxation lodgements are up to date. They are not required to have paid all tax obligations.

When companies are in financial distress, they often fail to comply with their taxation reporting obligations and the ATO debt is unreported. We assume this governance requirement has been installed to ensure the books and records reflect the company’s true liability position with respect to taxation.

Going forward with these governance prerequisites, companies will need to ensure that they comply with the payment of employee entitlements (including superannuation) and that they continually ensure taxation lodgements are up to date.

When claiming immunity from insolvent trading under safe harbour, there are two other important considerations:

  • if an administrator or liquidator is subsequently appointed over the company, directors may not be entitled to claim safe harbour if they fail to provide information or documents (in the form of books and records) to the administrator or liquidator, thus failing to achieve substantial compliance; and
  • directors may not be entitled to rely on information or documents in the form of books and records to support their immunity, if they failed to provide those materials to the administrators or liquidators when requested to do so.

Often when an administrator or liquidator is appointed, directors will attempt to hinder their investigations by withholding records. Insolvent trading claims by nature are litigious, costly and difficult to pursue.

We would suggest these conditions have been included to ensure the directors do provide adequate records to the administrator or liquidator.

Topics: Safe Harbour, Directors, Governance

Stefan Dopking

Written by Stefan Dopking

Stefan has over 30 years’ experience in corporate recovery and insolvency including valuable insights as a Senior Executive at the Australian Securities and Investments Commission (“ASIC”), where he was responsible for the organisation’s national insolvency and audit teams. With a focus on corporate receiverships, business reviews and financial health assessments for directors and lenders, Stefan is known for mediating outcomes in difficult appointments.