Reforms to the Corporations Act 2001 have introduced a regime to protect directors of companies from insolvent trading where the directors have a plan to rescue the business.

What is safe harbour?

‘Safe harbour’ is protection for company directors from liability for insolvent trading in the event that the company goes into liquidation. Safe harbour is not a type of appointment under the Corporations Act, a state that a company operates in, or something that directors can resolve that the company enters into. The protection arises due to the course of action that the directors take prior to liquidation as part of an attempt to turnaround or restructure.

How does Section 588GA(2) work?

The safe harbour laws which commenced on 19 September 2017 open opportunities for directors to turn around their financially distressed company without risking personal liability under Australia’s insolvent trading laws.

Essentially directors will not be personally liable for a debt incurred whilst the company is insolvent if:

• at a particular time after the directors suspects the company may be insolvent;
• the directors start developing one or more courses of action;
• that are reasonably likely to lead to a better outcome for the company; and
• the debt is incurred directly or indirectly with any such course of action.

When is safe harbour protection not available to directors?

There are very strict rules around when the safe harbour protection is available to directors. Most importantly it will not be available if the company has failed, within the previous 12 months, to substantially comply with:

• its obligation to pay its employees (including their superannuation); and
• its tax reporting obligations.

In determining whether the course of action was reasonably likely to lead to a better outcome, the director must consider such factors as to whether they have:

• kept themselves informed about the company’s financial position
• taken steps to prevent misconduct by officers and employees of the company that could adversely affect the company’s ability to pay all its debts
• taken appropriate steps to ensure the company maintained appropriate financial records
• obtained advice from an appropriately qualified advisor, and
• been taking appropriate steps to develop or implement a plan to restructure the company to improve its financial position.

A director seeking to claim the benefit of the safe harbour bears the evidentiary burden of establishing that:

• he or she developed a course of action that was reasonably likely to lead to a better outcome for the company; and
• the debt was incurred directly or in connection with the course of action.

It will then be up to the liquidator to show, on the balance of probabilities that the course of action taken was not, at the time, reasonably likely to lead to a better outcome.

What should directors of companies in financial distress do?

The legislation identifies a number of factors that are important in considering whether a plan is reasonably likely to lead to a better outcome for the company, including:

• obtaining advice from an appropriately qualified professional;
• developing or implementing a plan for restructuring the company;
• taken appropriate steps to ensure the company maintained appropriate financial records;
• obtained advice from an appropriately qualified advisor;
• and been taking appropriate steps to develop or implement a plan to restructure the company to improve its financial position;
• he or she developed a course of action that was reasonably likely to lead to a better outcome for the company; and
• the debt was incurred directly or in connection with the course of action.

Whether a course of action is reasonably likely to lead to a better outcome is assessed at the time the decision is made, not with the benefit of hindsight.

The benefits of safe harbour can also extend to a holding company where the directors of the subsidiary had the benefit of safe harbour and the holding company was taking reasonable steps to ensure that this was the case.

Ongoing director obligations

The protection provided to directors by the safe harbour is limited to civil liability under the insolvent trading provisions. Directors must continue to comply with all of their other legal obligations and duties and continuous disclosure requirements, if applicable, continue to apply.

If the restructuring plan were to fail and the company entered liquidation, the safe harbour will only protect directors from a liquidator’s insolvent trading claim if the directors comply with certain formal obligations during the liquidation, such as completing a RATA and providing books and records. These would generally include records of the restructuring attempts undertaken, including the documentation of the better outcome assessment.

A director that fails to provide access to books and records to a liquidator or administrator will be prevented from being able to rely on those materials as evidence of having complied with the safe harbour requirements but the liquidator or administrator must ensure they advise the directors of this consequence when making the request.

Documenting the engagement

The terms of the engagement and basis of remuneration should be documented and agreed with the client. As restructuring plans should be flexible, advisors should ensure that engagement letters are regularly updated to reflect any material changes to scope. Advice should be provided in writing. This will assist the directors to support their claim for safe harbour protection if the restructuring fails and a liquidator is appointed.

In the event of the appointment of a liquidator or voluntary administrator, you should co-operate with the appointee and provide any relevant requested information about the restructuring and your engagement.

Contact Pilot

Should you require advice regarding safe harbour, please contact Bradley Hellen on (07) 3023 1300.