Safe Harbour aims to encourage directors to take reasonable risks to save a company from financial distress without exposing themselves to personal liability for insolvent trading.
The statutory provision provides relief from potential personal liability for directors in situations where the company is experiencing financial difficulties and the directors meet strict criteria.
Amongst other things, directors must show that they have taken reasonable steps to develop and implement a restructuring plan that is likely to lead to a better outcome for the company than an immediate liquidation, whilst ensuring that employee payment, tax lodgement and other compliance obligations are met.
However, directors who believe they are covered by Safe Harbour may not be adequately protected for one or more of the following reasons:
- Employees were not being paid in accordance with the Fair Work Act, their Award, or employment agreement, or
- The turnaround plan was not documented, or
- The plan was not supported by a financial model (with realistic assumptions) to show that it was achievable, or
- There was no better outcome analysis, or
- The directors cannot prove they had met the compliance requirements of Safe Harbour.
These situations can often be remedied with the assistance of an appropriately qualified adviser, which is one of the criteria for effective Safe Harbour protection.
Companies that have implemented the Safe Harbour criteria and successfully exited from Safe Harbour offer a guide to those situations when Safe Harbour might be appropriate in conjunction with other business turnaround and restructuring strategies.
Case Study 1
This retail Company had experienced losses, which resulted in the Company being under-capitalised. Unprofitable stores were committed to long leases, and, following the departure of the CEO, the Company was at a critical point.
- Corporate advisers were appointed to seek a sale of the business.
- Forecasts showed the Company needed additional debt or equity to survive and restructure the business.
- A detailed operational turnaround and restructuring plan was developed and implemented with the strong support of its bank.
- Despite several interested parties, a sale of the business did not eventuate.
- When COVID derailed the plan, the Company lost over $2 million in 3 months… and was back to square one.
- The Board and management regrouped and developed a new turnaround plan to cope with rolling store closures.
Five years after taking advantage of the Safe Harbour protection (and maintaining it throughout), the Directors were confident that the risk of insolvency had become remote and they no longer needed Safe Harbour protection.
Case Study 2
The director of a group of companies suspected possible insolvency at the subsidiary level due to probable insolvency at the parent company. A corporate transaction that would cut the subsidiaries’ ties with the parent was imminent. However, in the meantime the director could be liable for insolvent trading if the transaction fell over.
The Group’s legal advisers recommended that the director implement Safe Harbour protection to cover this risk.
Despite some delays to the transaction, and additional complexities caused by the appointment of an insolvency practitioner to the overseas parent, Safe Harbour gave the director confidence to continue to pursue the transaction.
The Group exited Safe Harbour once the transaction completed, some three months after Safe Harbour protection was originally implemented.
As there is no obligation on a company to publicly disclose Safe Harbour protection, these situations rarely come to light.
Safe Harbour should be considered in any situation where a material corporate transaction, capital raise, financial restructuring, operational turnaround or major project is required to save the company, where the course of action is being developed or implemented, but where there is residual completion risk or uncertainty.
However, it is important to note that Safe Harbour is not a blanket protection and does not excuse directors from acting dishonestly, fraudulently, or negligently. Directors are still required to exercise due diligence, act in the best interests of the company for a proper purpose, and comply with the strict requirements of the Safe Harbour provisions to be protected.
We are seeing companies successfully exit Safe Harbour having improved the outcome for all stakeholders, in situations where the directors had been concerned about their personal liability and considering voluntary administration.
If you are concerned about personal liability for insolvent trading, call us first to see if you are eligible for Safe Harbour protection.
