On 19 September 2017, changes to the Corporations Act 2001 (Cth) (‘the Act’) in relation to Safe Harbour became effective.
The Safe Harbour changes provide company directors with a process and most importantly, time to develop a turnaround plan – this is a real alternative to placing a company into Voluntary Administration due to the risk of personal liability for directors in relation to trading whilst insolvent.
This update outlines these changes and flags issues that directors and advisors need to be aware of when taking steps to stabilise and turnaround – whether it be from a financial, operational or strategic perspective or a combination of these.
What is Safe Harbour?
The changes to the law can provide protection for company directors from personal liability for insolvent trading under subsection 588G(2) of the Act, where the company is undertaking a restructure outside of formal insolvency – within a strict framework. The intent of the changes is to enable recovery and encourages directors to take reasonable steps towards achieving this recovery.
What is Insolvent Trading?
Under section 588G of the 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 new Safe Harbour legislation is intended to protect directors who take appropriate action in accordance with their duties as directors. The protection of Safe Harbour does not extend beyond the civil liability set out in subsection 588G(2) of the 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 provides protection to directors in relation to debts that a company incurs during this period and 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. This protection ceases if:
- the directors fail to take a course of action within a reasonable period of time
- 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.