“Safe Harbour” legislation was introduced in Australia in 2017. This legislation provides that directors will not be personally liable for debts incurred after the date of a company’s insolvency if they can show such debts were incurred in connection with a course of action reasonably likely to lead to a better outcome for the company and its creditors as a whole rather than proceeding to administration or liquidation. The safe harbour provisions operate to carve directors out from the civil insolvent trading provisions of the Corporations Act 2001.
What is insolvent trading?
To better understand how safe harbour provisions work it is important to understand the term ‘insolvent trading’. Under the Corporations Act, if a company is insolvent and a director allows the company to incur a new debt, the director can be personally liable for the new debts incurred. The law makes directors responsible for ensuring that their company does not trade while insolvent.
Why are Safe Harbour provisions necessary?
The safe harbour provisions address the concern about potential insolvent trading claims, forcing directors to place their companies into administration prematurely rather than allow the opportunity to restructure them. The provisions focus on the behaviour of directors in trying to turn their company around, rather than declaring insolvency. They are intended to encourage honest company directors to remain in control of a financially distressed company, to take reasonable steps to restructure and to allow the company to hopefully trade out of its difficulties.
Defences under Safe harbour provisions
The provisions under the Act provide directors with a form of defence to insolvent trading if:
- at a particular time after a director starts to suspect a company may become or be insolvent, that director starts 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 in connection with that course of action and during the specified period.
Key steps triggering safe harbour protection
Directors seeking safe harbour protection should:
- Check that outstanding employee entitlements are paid to ensure that the company will beable to continue to pay these entitlements by the time they fall due (safe harbour protection will not be available to directors who fail to provide for employee entitlements or fail to keep up to date with tax lodgements);
- Check that the company is meeting all its tax reporting obligations through systems that enable the company to continue to meet their obligations;
- Check for outstanding issues of any misconduct of employees and officers thatmust be resolved in accordance with policy and misconduct compliance;
- Check that existing insurance, indemnity policies and D&O insurance are up-to-date;
whether it will lead to a better outcome for the company to immediately appoint an administrator or liquidator before incurring any further company debt;
- Ensure relevant documents are recorded and carefully archived (the safe harbour defence will fail if a director has concealed, destroyed or removed books of the company or fails to provide a liquidator with access to books or other material);
- Obtain advice from qualified advisers early.
Consider placing the following items on the Board’s agenda as ‘standing’ items for consideration and discussion:
- a) the adequacy of financial records and how these financial records might be improved;
- b) the financial position of the company, and whether it has deteriorated or improved, and how this might impact the availability of the safe harbour;
- c) whether further advice needs to be obtained from an appropriately qualified adviser;
- d) whether the restructuring plan is being implemented, and whether adjustments will be required to ensure that the desired outcome will be achieved; and
- e) whether, all things considered, it would be better for the company to immediately appoint an administrator or liquidator.
If the company is placed into formal insolvency, directors should ensure compliance with their obligations relating to the provision of books, information and other assistance to a liquidator, administrator or controller.
Our Commercial & Disputes lawyers can assist you with any matters relating to Safe Harbour or Insolvency issues that may arise.
Helen Mastos, Special Counsel from our Commercial & Disputes division has extensive insolvency experience so for tailored assistance and advice please contact Helen Mastos today on +61 3 9822 8588 or you can email us here.
Insights by Bianka Duzelovski