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SAFE
HARBOUR

An avenue for protecting company directors

‍Are you looking to implement a financial or operational restructure, but are concerned about the risk of personal liability for insolvent trading as a company director?

Insolvent trading liability can have serious implications for directors, potentially impacting their personal assets and professional standing. However, it's important to know that there are strategies available to mitigate this risk while you seek to implement a better outcome than liquidation.

Our expertise lies in guiding directors and companies through these challenges, offering tailored solutions and support to navigate the complexities of Safe Harbour provisions. With our assistance, you can confidently manage financial difficulties while safeguarding your personal liability.

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What is Safe Harbour?

Safe Harbour is a legal provision within the Corporations Act that offers protection to company directors from personal liability for insolvent trading if certain conditions are satisfied.

It allows directors to continue trading while the company is insolvent if they are pursuing a course of action (restructuring plan) that is reasonably likely to lead to a better outcome for the company than immediate administration or liquidation.

Safe Harbour aims to encourage directors to responsibly take proactive steps to restructure the company's affairs, thereby increasing the likelihood of preserving value for stakeholders and avoiding the unnecessary collapse of viable businesses.

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Precision strategies for navigating financial distress

What is insolvent trading?

Insolvent trading refers to a situation where a company continues to incur debts when it is unable to pay its debts as they fall due, or when its liabilities exceed its assets. In essence, it occurs when a company trades while insolvent.

In Australia, directors have a duty to prevent insolvent trading, meaning they must take reasonable steps to ensure the company does not incur debts it cannot repay. If directors fail to fulfil this duty and allow the company to continue trading while insolvent, they may be held personally liable for the debts incurred during that period. Insolvent trading can lead to serious legal and financial consequences for the company and its directors.

Benefits of Safe Harbour

Directors

It provides directors with a degree of protection from personal liability, enabling them to explore restructuring options without the fear of legal repercussions.

Companies

Safe Harbour allows companies to continue trading and potentially recover from financial distress by providing directors with the flexibility to implement turnaround strategies.

Stakeholders

Safe Harbour can preserve value for stakeholders, including employees, creditors, and shareholders, by facilitating the company's survival and avoiding the unnecessary collapse of viable businesses. Additionally, it fosters transparency and encourages directors to communicate openly with stakeholders about the company's financial situation and restructuring plans.

Market

Safe Harbour is a confidential process, preserving value and reputations.

When to use Safe Harbour

For directors navigating the complexities of financial or operational distress, the answer lies in proactive evaluation and early engagement with qualified advisors. Early engagement enhances the chances of success and ensures optimal protection for directors, companies, and stakeholders alike.

Safe Harbour is relevant when a company faces financial distress but still has options to complete a turnaround

  • Safe Harbour provides a legal framework for directors to continue trading while the company is or may shortly become insolvent, to achieve a better outcome than immediate administration or liquidation.
  • This provision is particularly relevant when there's a realistic prospect of implementing a turnaround plan that could lead to the company's recovery and long-term viability.
  • It allows directors to explore restructuring options and take proactive steps with a recognised restructuring advisor to improve the company's financial position, thereby preserving value for stakeholders.

Early engagement provides the best possible opportunity to maximise protection and implement a turnaround plan

  • By acting promptly, directors can assess the company's financial situation, identify restructuring opportunities, and develop a comprehensive turnaround plan tailored to its specific needs early.
  • Early engagement also provides directors with more time to seek appropriate professional advice, gather relevant information, and implement strategic measures to address financial challenges effectively.

It’s critical to seek professional advice early

  • Seeking professional advice from qualified advisors is a condition of securing Safe Harbour but is also essential for navigating the complexities of financial distress and maximising the benefits of the restructuring plan being pursued.
  • Early engagement with advisors allows directors to gain insights into the legal and practical implications of Safe Harbour, understand their obligations under the Corporations Act, and develop a clear roadmap for restructuring.
  • Advisors can provide valuable expertise, guidance, and support throughout the Safe Harbour process, helping directors make informed decisions and mitigate risks effectively.

Eligibility criteria for Safe Harbour

To qualify for Safe Harbour protection, several key legal criteria must be satisfied:

  • Payment of employee entitlements, including superannuation contributions as and when they fall due.
  • Timely lodgement of all required returns, notices, and documents as per taxation laws.
  • Demonstrated understanding of the company's financial position.
  • Implementation of measures to prevent misconduct within the company.
  • Maintenance of accurate and appropriate financial records.
  • Seeking advice from an appropriately qualified advisor.
  • Development of at least one' course of action' that has a reasonable expectation of providing a better outcome for the Company.
  • Incurrence of debts directly related to the pursued courses of action.
  • Adherence to a reasonable timeframe for implementing restructuring efforts.

Safe Harbour process

Safe Harbour scenarios

Although Safe Harbour can be utilised in several scenarios and is specific to your circumstances, some recent examples where the protections were utilised are as follows.

  • During the sale of business or business unit, aimed at paying down debt and alleviating financial distress.
  • Throughout a crucial capital raising process (either through shareholder equity or debt financing).
  • While negotiating disputes with the Australian Taxation Office.
  • During a period of manufacturing scale-up to enhance revenue and performance.

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