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”).
If a director does not take action to prevent insolvent trading, then they could be held personally liable for the debts incurred by the company after the date when they should have taken action. The safe harbour provisions came into effect in September 2017. They can provide directors with a defence to a claim for insolvent trading from a subsequently appointed liquidator where the directors rely on safe harbour provisions during a restructure.
Does my company qualify?
To be able to enter the safe harbour period, companies and their boards need to:
- have an actual suspicion of insolvency and be able to prove the basis of this suspicion. Directors cannot apply the safe harbour retrospectively. It can only be exercised upon execution of the restructure plan;
- have a plan that is “reasonably likely” to achieve a better outcome for the company than an immediate appointment of a voluntary administrator or liquidator;
- ensure that all entitlements to employees are up to date and paid when they fall due; and
- ensure all statutory lodgements are up to date.
Why would I use it?
Company directors can use safe harbour in circumstances where a plan exists to restructure the company, but the company is insolvent or likely to become insolvent. It allows the directors to continue to trade while they put their plan in place, avoiding the formal appointment of a voluntary administrator or liquidator.
A restructure via a safe harbour may be more flexible than a voluntary administration and deed of company arrangement. These avenues can have strict timeframes and statutory limitations that may not give a company’s restructure plan enough time to take effect. Under safe harbour, the board will also retain control of the company whilst undertaking its restructure.
When would I use it?
The directors must have real and documented concerns about the solvency of the company. They must also have a plan to restructure the business that they believe will result in a better outcome than the immediate appointment of an external administrator.
How do I use it?
As always, directors need to comply with their general duties as stipulated under sections 180-184 of the Corporations Act 2001. In particular, the duty to exercise due care and diligence and the duty to act in good faith, in the best interests of the corporation and for a proper purpose.
After forming the view that the company is insolvent or likely to become insolvent, the board needs to formulate a plan that is reasonably likely to lead to a better outcome for the company. To be able to use the safe harbour legislation, directors need to consider the provisions that set out what a liquidator, retrospectively, may consider relevant, including:
- the board is properly informing themselves of the company’s financial position;
- the board is taking appropriate steps to prevent any misconduct by officers or employees that could adversely affect the company’s ability to pay all its debts;
- the board is keeping appropriate financial records consistent with the size and nature of the company;
- the board is obtaining advice from an appropriately qualified entity who is given sufficient information to give appropriate advice; and
- the board is developing or implementing a plan for restructuring the company to improve its financial position.
Who do I tell?
Under the safe harbour legislation, there is no edict to publicise the start of your restructure plan.
Boards should be aware, however, of any contractual or external requirements compelling them to notify various parties. For example:
- stock exchange listing requirements oblige listed entities to make continuous disclosures;
- banking and financial facilities may contain various disclosure covenants;
- licence/certification rules may require disclosure to governing or professional bodies; and
- supply agreements - where companies intend to set-up new supply agreements during the safe harbour period, directors may need to vouch for the company’s solvency.
Invariably, creditors and suppliers may become aware of the company’s insolvency and receive payments during the safe harbour. Should the company end up in liquidation, such payments may be clawed back as unfair preference payments. Directors of companies who are creditors or suppliers of companies that are in safe harbour should consider potential exposures and seek advice to minimise this risk.
What do I do then?
Implement the plan and continually monitor results. Document the review and any decisions or amendments made to the plan.
How does it end?
As safe harbour is ultimately a protection for directors to allow them to continue to trade an insolvent company whilst they restructure. Its protection ends once the company returns to solvency. A diligent board should seek advice from their adviser to satisfy themselves of the company’s solvency and its longer-term prospects.
What if it all goes wrong?
A company considering a restructure plan and safe harbour should also have an alternative plan in case the restructure does not work. In most cases, an unsuccessful restructure will result in the company appointing a voluntary administrator or liquidator.