Is the fear of insolvent trading a concern for you as a company director? If so, the new safe harbour reforms may help you sleep easier at night.
In order to prepare you for these reforms, which have recently come into effect, we cover the essentials of what safe harbour protection will mean…
Australian insolvency laws
Australia’s insolvency laws are considered by many to be overly harsh and not conducive to saving troubled businesses, especially compared to the UK and US.
This can cause directors to prematurely appoint a liquidator or administrator, protecting them from personal liability, rather than seeking to carry out a turnaround.
But new ‘safe harbour’ reforms are helping Australia catch up.
The new laws, contained in the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017, introduce amendments to the insolvent trading provisions in the Corporations Act 2001.
How does safe harbour protection work for directors?
The new safe harbour laws ensure protection for directors from personal liability for insolvent trading when undertaking a genuine business turnaround.
Safe harbour protection commences when the directors begin to develop one or more courses of action that are reasonably likely to lead to a better outcome for the company than the immediate appointment of a liquidator or administrator.
Safe harbour protection ceases if the directors:
- Fail to implement a course of action that has been developed,
- Cease to implement a course of action, or
- Upon the appointment of a liquidator or administrator.
How does a director access safe harbour protection?
For the purposes of working out whether a course of action is reasonably likely to lead to a better outcome for the company, directors will need to consider whether they are:
- Properly informing themselves of the financial position of the company,
- Taking appropriate steps to prevent misconduct by officers,
- Taking appropriate steps to ensure the company is keeping proper financial records,
- Seeking advice from an ‘appropriately qualified entity’, and
- Developing or implementing a plan for restructuring the company.
Who is an ‘appropriately qualified entity’?
Guidance is yet to be provided on precisely what constitutes an ‘appropriately qualified entity’. It is therefore up to directors to assess the quality of their advisor which includes:
- Registered liquidators, and
- Suitably qualified and experienced turnaround professionals (which may include appropriately experienced lawyers and accountants).
Directors should be wary of engaging an unqualified pre-insolvency advisor to assist with this, as poor advice may leave you personally exposed to insolvent trading if your turnaround plan is unsuccessful.
Other FAQs about the safe harbour reforms
Will safe harbour protect directors from personal guarantee claims in liquidation?
No. If a director’s turnaround plan is unsuccessful, they will still be personally liable for debts owed to creditors with personal guarantees or under ATO director penalty notices.
When’s the best time to access safe harbour protection?
As with any problems that arise, acting early ensures problems are dealt with before they cause insolvency and failure. If a company trades while insolvent before or without properly enacting safe harbour protection, or after failing to meet the ongoing obligations, directors may be exposed to personal liability for debts incurred during that period, which remain unpaid at the time of liquidation.
How do safe harbour laws help directors in practice?
The best thing directors can do to help ensure their businesses survive is to act early.
Insolvent trading claims against directors only arise in liquidation. If a turnaround is successful, directors will not need to rely on safe harbour. However, failing to implement early may leave directors exposed when it becomes apparent that the turnaround will be unsuccessful.
It will take some time for safe harbour practices to become embedded into corporate culture. However proactive directors, whether enacting safe harbour or not, will be better placed to avoid liquidation or administration when taking early action to deal with their company’s financial difficulties.
Once problems are diagnosed, appropriate steps can be taken, whether through specific measures or a comprehensive turnaround and restructuring engagement.
When is it too late to access safe harbour protection?
Safe harbour protection will not be available beyond a certain point. Directors wishing to access safe harbour will need to:
- Maintain proper financial records,
- Ensure they are kept up to date with the company’s financial position,
- Pay employee entitlements and superannuation, and
- Report their ATO debts on time.
Failure in these areas is often an early warning sign of insolvency, so it’s important to look out for these.
Accountants, bookkeepers, and financial advisors can play a key role in identifying when these problems arise. With more active monitoring and involvement in their clients’ businesses, they can stay on top of any financial issues that may be developing, ensure proper financial records are being maintained and, if things do start to go downhill, help clients seek specialist help from an appropriately qualified turnaround or insolvency professional.
What’s excluded from safe harbour?
There are some other important aspects of the safe harbour reforms to bear in mind:
- They do not protect directors from criminal liability for insolvent trading,
- The protections only apply to debts incurred during the development and implementation of the turnaround plan. If a company has traded whilst insolvent prior to implementation, directors may be personally liable for those debts,
- To rely on the protections, all employee entitlements and superannuation need to be paid and tax lodgements need to be maintained, and
- Whilst the safe harbour laws are not a defence, a director still needs to provide evidence that a ‘reasonable possibility’ of a better outcome existed.
If you would like to further understand the risks of insolvent trading and how to access safe harbour, we’re happy to assist. Remember – acting early is the key to a successful outcome. Contact us for a free confidential discussion on 07 3221 0055.