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.
Welcome to Harbour Masters, where we offer insights and updates on the expertise and guidance available for the Directors of companies in need of advice in the face of stiff trade winds. Our updates focus on the critical business topics of restructuring, turnaround, and the availability of the new 'Safe Harbour' provisions, all designed to help companies renew, restructure, and rebuild.
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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:
The Treasury Laws Amendment (2017 Incentives No 2) Bill 2017 has earlier today passed both houses.
The bill amends the Corporations Act 2001 to create a safe harbour for company directors from personal liability for insolvent trading if the company is undertaking a restructure outside formal insolvency.
As previosuly reported, the 'Safe Harbour' law reform aims to create a cultural change among company directors.
It encourages Directors to retain control of their company, engage early with appropriate professional advisers and take considered, reasonable risks to facilitate the company’s recovery rather than prematurely deciding on a formal appointment.
The legislation addresses the problems for directors that arise when they learn about their company’s financial difficulties. The reforms provide a period of “breathing space”. During this time, directors will, with the assistance of professional external advisers, be able to work through a plan or plans for the turnaround of the company. The breathing space is not “carte blanche”. As outlined below, to benefit from the safe harbour laws, directors will need to comply even more rigorously with some requirements than would be the case for a solvent company. Such requirements may include the lodgement of Activity Statements and adherence to principles of proper corporate governance.