Company directors in Australia have a statutory duty to prevent insolvent trading. With the introduction of Safe Harbour rules in 2017, the nature of this duty has been slightly changed. So, what are the Safe Harbour rules and how do they impact company directors? We explore this in detail below.
Understanding the Safe Harbour law
The Safe Harbour provisions are contained in s 588GA (“Safe Harbour – taking a course of action reasonably likely to lead to a better outcome for the company”) of the Corporations Act 2001.
When did the Safe Harbour Legislation come into effect in Australia?
The Safe Harbour legislation came into effect on September 2017, when the government passed the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill.
What are the Implications of the Safe Harbour Provisions?
Understanding the Safe Harbour provisions is critical, as they can protect directors from personal liability in terms of the civil provisions relating to the duty to prevent insolvent trading in s 588G(2).
In Australia, directors of companies have a positive duty to prevent insolvent trading. If they don’t fulfill this duty, they could face severe civil and criminal penalties, including personal liability for debts incurred by the company during insolvent trading.
s 588GA means directors will only be at risk of personal liability for debts incurred during insolvent trading if it can be shown they hadn’t started developing one or more courses of action that were reasonably likely to lead to a better outcome for the company.
- Policy and practice – At a level, the provisions could encourage directors to be innovative and take measured risks for better business outcomes. In practice, it could lead to better outcomes, including survival, for insolvent businesses with the potential for profitability in the longer term.
- Timing of application – The Safe Harbour provisions apply to debt indirectly or directly incurred after the director starts developing one or more courses of action. They stop applying when the director stops taking the course(s) of action or when the action stops being reasonably likely to lead to a better outcome for the company. Also, they stop applying when the director fails to take the course(s) of action within a reasonable period of time.
- Better outcome – Better outcome means an outcome better than the likely outcomes for the company and its stakeholders (including shareholders and employees) if it went directly into administration or liquidation.
- Reasonably likely – Note the course of action has to be reasonably likely to improve things for the company at the time the decision was taken. So the director’s plan doesn’t need to have succeeded for the ‘defence’ to apply, but the court might look at whether the director sought advice from an “appropriately qualified entity” such as a qualified restructuring advisor, and whether they had a formal restructuring or turnaround plan in place.
- Conditions – The director’s company needs to have kept up with all employee entitlements, as well as tax reporting obligations.
The Safe Harbour provisions could give companies more scope to explore options other than insolvency proceedings. Instead of opting too quickly for insolvency proceedings, directors could explore things like restructuring pathways with a lower risk of penalties from insolvent trading.
When should Safe Harbour be considered?
The operation of the Safe Harbour provisions is somewhat limited. However, understanding Safe Harbour can be critical for company directors looking at restructuring, turnaround, and other business-improvement strategies for a company in financial strife. If you’re operating a company with financial difficulties at risk of trading while insolvent, you’ll want to consider whether Safe Harbour could apply to the decisions you make about the future of the company.
So, if you’re a director of a company facing financial challenges and you’re concerned about the risks associated with insolvent trading, taking Safe Harbour – and when and how it comes into effect for you – into account could be helpful. It can inform your compliance plans, your risk-management approach, and guide you in your restructuring, turnaround, and other improvement plans.
What does the Safe Harbour law mean for directors?
The Safe Harbour law means directors have more scope to attempt restructuring, turn around, or other business-improvement options rather than going straight to administration or liquidation. Instead of resorting to insolvency procedures right away, company directors might be motivated to try different plans for turning around the company, given the lower risk of personal liability and criminal and civil penalties.
In summary, the Safe Harbour rules, under very specific conditions, could allow company directors to avoid personal liability relating to the civil insolvent trading provisions. Since they’re relatively new and haven’t been tested in the courts, you should always get advice from turnaround and restructuring experts in a timely manner if you’re a company director and you’re wondering whether they would apply to you.
At TPH Advisory, we’re well-informed on how Safe Harbour works and when it applies for directors of companies facing financial challenges. We can assist you and your company with relying on this provision if it’s available in your situation, such as when restructuring and/or turnaround strategies haven’t given the intended results and your company has entered liquidation.Contact us today to find out more about how we can give you expert advice about the Safe Harbour laws.