In Australia, company directors have a duty to prevent their company trading while insolvent, and directors can be personally liable – and face civil and criminal penalties – for any debts incurred by the company when it's trading while insolvent.
The safe harbour provisions were introduced in 2017 and 2018 to encourage a restructuring culture, given the tough penalties for directors who engage in insolvent trading. With the safe harbour provision, it's possible directors might be less inclined to rush to start insolvency processes – and be more likely to explore potentially effective restructuring options for the business.
With the safe harbour provisions, directors will only be liable for debts incurred when the company was trading while insolvent if it's proven they weren't developing or pursuing a course of action that was reasonably likely to result in a better outcome for the company. Here, the better outcome in question is assessed against the likely result from going directly to administration or liquidation.
So what does this mean for directors? It means company directors likely have more leeway to stay in control and try to effect plans for improvement when a company is in financial strife even if there's the risk of insolvent trading.
Note safe harbour is available as a “defence” only if you properly provide for employee entitlements and seek advice from appropriately qualified restructuring advisors, in addition to other conditions.
When it comes to restructuring and turnaround, the safe harbour provisions could apply in the sense it gives the director more room to move in pursuing restructuring and/or turnaround (instead of going immediately into insolvency processes). Even if you're not pursuing restructuring or turnaround, raising the safe harbour provision (for trading while insolvent) could be an option if you’ve engaged in other types of business-improvement action "reasonably likely" to help the company.
The safe harbour provision are complex and they're a relatively new rule, so it's best to get advice from turnaround and insolvency advisors like TPH Advisory if you need to rely on this provision. At TPH Advisory, we're knowledgeable about how this new provision could be used and we can assist you with raising this provision. If it’s relevant to the situation, we seek to raise it to protect our company-director clients from personality liability if any associated restructuring and/or turnaround haven't had the intended impact on the business and the company has gone into liquidation.
In the course of providing restructuring and turnaround services, we're always mindful of the personal situation of company directors and other staff, and we'll act to protect your personal interests while assisting your business with the best possible course of action.