Safe Harbour – is it really a viable protective option for directors?

July 17, 2019

Safe Harbour

Since their inception in September 2017, the safe harbour laws have been welcomed by directors and their advisors alike. Offering ‘safe harbour’ from civil insolvent trading claims from Liquidators, the law reforms were regarded as a significant step forward for the restructuring and insolvency industry in Australia.

Historically, at the first indication of insolvency, directors would often seek out an insolvency practitioner to take on a formal appointment in order to negate the personal exposure to a breach of the insolvent trading provisions. However this course of action was often coupled with a closure of a business, the loss of jobs and erosion of asset values and the overall return to stakeholders.

The safe harbour laws serve to offer directors some ‘comfort’ on a personal liability level from the largely draconian insolvent trading provisions of the Corporations Act 2001, when endeavouring to seek out a course of action which is reasonably likely to deliver a better outcome for stakeholders than an immediate formal insolvency appointment, in times of financial distress and potential insolvency.

By entering into safe harbour, directors can avail themselves of the protections safe harbour affords and can proceed (on the basis that certain criteria are met) to investigate options to navigate the choppy waters.

When working out whether a course of action is reasonably likely to lead to a better outcome, regard may be had to whether the director is:

  • properly informing themselves of the company’s financial position; or
  • taking appropriate steps to prevent any misconduct by officers or employees of the company that could adversely affect the company’s ability to pay all its debts; or
  • taking appropriate steps to ensure that the company is keeping appropriate financial records consistent with the size and nature of the company; or
  • obtaining advice from an appropriately qualified entity who was given sufficient information to give appropriate advice; or
  • developing or implementing a plan for restructuring the company to improve its financial position.

Most of these points make sense, but from a bigger picture perspective, it is not yet clear what a ‘better outcome’ is, as safe harbour is not well tested in practice.

Furthermore, it is not yet resolved who, or what, an ‘appropriately qualified entity’ is; however it is widely accepted to mean an insolvency practitioner or solicitor.

The safe harbour eligibility criteria for a director in connection with the incurrence of a particular debt are set out below:

  • The company must pay the entitlements of its employees by the time they fall due;
  • Give (lodge) returns, notices, statements, applications or other documents as required by taxation laws.

And importantly:

  • There cannot be ‘less than substantial compliance’ with these requirement; and
  • There cannot be more than two failures by a company to do any and all of these matter during the 12 months ending when a particular debt is incurred (i.e. a ‘two strike’ rule).

Whether or not ‘substantive compliance’ has been breached will turn on the practical implications of the particular issue. The language used in relation to the payment of employee entitlements is very unambiguous; however would lodging a BAS a day or so late constitute a breach of ‘substantive compliance’ given payment of the corresponding debt may not be due on that date?

Key take-away points:

  • Safe harbour is a great idea in theory; however the way the legislation plays out in practice is not all that clear as yet.
  • Industry commentators suggest that safe harbour encourages early engagement on the tricky issue of solvency, is unlikely to be misused by directors and fosters enhanced returns to stakeholders, all whilst providing directors with some comfort as they assess ways to move forward.
  • Directors of smaller proprietary companies are anecdotally unlikely to take up the safe harbour option on the basis of costs, but also the fact that most SME directors already have their personal assets on the line under personal guarantees given to bankers, suppliers etc.
  • At HLB Mann Judd Insolvency WA, we have been approached to take on only a handful of safe harbour engagements. Our experience is that most directors, and even their accountants and advisors, have only a superficial understanding of the provisions and how they may be of benefit.
  • It is clear that better education is required around safe harbour and how it can be best utilised by directors.

About the author

Greg Quin is a Director at HLB Mann Judd Insolvency WA and has been with the team for 10 years. Greg oversees the daily operations of the many insolvency appointments managed by the HLB Insolvency team and looks after the operations of the practice.

If you have any queries about insolvency matters, please feel free to contact Greg on 08 9215 7900, 0402 943 091 or via email to gquin@hlbinsol.com.au.

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