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.
Directors should be able to focus on managing their business and making decisions to restructure it to ensure its future viability. This is preferable to placing their company into voluntary administration or creditors’ voluntary liquidation in order to limit their exposure to potential liability for insolvent trading.
We recommend that their adviser is a member of the Australian Restructuring Insolvency and Turnaround Association (ARITA) with a background in insolvency or turnaround management. This helps to ensure that the action plan is suitable in the circumstances and whether other options may be available that will result in a better outcome for all stakeholders.
Some of the key things for directors to be aware of are:
- Continuous disclosure requirements, if applicable, continue to apply
- The protection provided by the safe harbour is limited to civil liability under the insolvent trading provisions. Directors must continue to comply with all their other legal obligations and duties such as their director’s duties, including Part 2D.1 of the Act.
- The safe harbour protection is only available where directors:
- develop or take 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 must be implemented within a reasonable period).
- ensure that the company complies with its obligation to pay its employees (including their superannuation), and
- ensure that the company meets its tax reporting obligations.
- Hope is not a strategy. Directors who take a passive approach to the company’s position or whose action plans are fanciful will fall outside of the safe harbour protection.
- The safe harbour only extends to debts incurred directly or indirectly in connection with the course of action or its development after the restructure plan has been developed and implemented.
- Whether a course of action is reasonably likely to lead to a better outcome is assessed as at the time the decision is made, not with the benefit of hindsight.
- The Explanatory Memorandum provides a list of indicative factors (which are not prescriptive) to be considered in determining whether a course of action was reasonably likely to lead to a better outcome. These factors are whether the person has:
- kept themselves informed about the company’s financial position
- taken steps to prevent misconduct by officers and employees of the company
- taken appropriate steps to ensure the company maintained appropriate financial records
obtained appropriate advice from an appropriately qualified adviser, and
- taken appropriate steps to develop or to put in place a plan to restructure the company to improve its financial position.
It is important to reiterate that the safe harbour will not apply if the directors of the company:
- fail to keep proper books and records
- do not properly provide for the entitlements of its employees (i.e. superannuation obligations must be up to date)
- fail to prevent officers or employees from engaging in misconduct, and
- fail to keep the company’s taxation lodgements up to date.
The legislation does not define the term ‘appropriately qualified adviser’. However, the Explanatory Memorandum states that ‘appropriately qualified’ is used in the sense of ‘fit for purpose’ and is not limited to particular qualifications.
To find out more ways that the legislation is likely to impact upon Directors in general, or to discuss your specific situation, please contact us