Protecting directors and preserving value
Safe Harbour provisions in the Corporations Act provide company directors with a process and, importantly, time to develop a turnaround plan.
This is a real alternative to placing a company into voluntary administration, which directors may be required to do, given the risk of personal liability for directors in relation to insolvent trading. The legislation became effective on 19 September 2017, following changes to the Corporations Act.
It is important that directors and advisors are aware of certain factors when taking steps to stabilise and turnaround - whether from a financial, operational or strategic perspective or a combination of these.
What is Safe Harbour?
The Corporations Act can provide protection for company directors from personal liability for insolvent trading under the Corporations Act, where the company is undertaking a restructure outside of formal insolvency if the directors comply with certain requirements. The changes intend to enable recovery and encourage directors to take reasonable steps towards achieving this recovery.
What is insolvent trading?
Under Insolvent Trading provisions in the Corporations Act, a director may be personally liable for debts incurred by the company if:
- they are a director of a company at the time when the company incurs a debt
- the company is insolvent at that time or becomes insolvent by incurring that debt and
- at that time, there are reasonable grounds for suspecting that the company is insolvent or would become insolvent.
The Safe Harbour legislation is intended to protect directors who take appropriate action in accordance with their duties as directors. However, it does not extend beyond the civil liability in the Corporations Act. During Safe Harbour, directors must continue to comply with all other duties and obligations under the law, including any continuous disclosure obligations (if relevant).
What is the new Safe Harbour legislation?
The legislation protects directors in relation to debts that a company incurs during the period of taking a course of action that is reasonably likely to lead to a ‘better outcome’ for the company than the immediate appointment of an external administrator.
When does Safe Harbour end?
This protection ceases if:
- the directors fail to take a course of action within a reasonable period
- the course of action ends
- the course of action stops being reasonably likely to end in a better outcome for the company or
- the company enters external administration.
What is a better outcome?
A 'better outcome' for the company is defined as 'an outcome better for the company than the immediate appointment of an administrator or liquidator, to the company'. This is an objective test and includes:
- the steps taken to prevent misconduct by officers and employees of the company
- the steps taken to ensure the company maintains appropriate financial records
- obtaining appropriate advice from an ‘appropriately qualified entity’
- the directors keep themselves informed about the company’s financial position and
- developing and implementing a restructuring plan to improve the company’s financial position.
If directors are starting to suspect insolvency or a risk of insolvency, they should obtain financial and legal advice as needed and if they want to rely upon Safe Harbour, consider engaging an ‘appropriately qualified entity’ (‘AQE’) to assist them.
What is an appropriately qualified entity?
An AQE is not defined in the Corporations Act and will be dependent on the situation. This could include someone who:
• has expertise in the operational management, financial and legal aspects of the restructuring
• has industry or specialist experience that is relevant to the issues being encountered
• holds appropriate tertiary qualifications and experience in turnaround and/or restructuring management
• holds appropriate professional indemnity insurance and suits the size, scale and complexity of the company or business operations.
When are you unable to use Safe Harbour?
If a company ends up in external administration, there are certain circumstances where directors will not be able to rely upon Safe Harbour, notwithstanding that the company has been undertaking a course of action with a view to restructuring. These circumstances include where books and records are not provided to a liquidator or administrator, not meeting payment of employee entitlements and not meeting taxation obligations.
How can Cor Cordis assist?
If you require further information or would like a confidential discussion, please contact one of our partners at our office near you.