The new ‘Safe Harbour’ reforms provide directors with protection from insolvent trading liability where a debt is incurred directly or indirectly in connection with one or more courses of action that are reasonably likely to lead to a better outcome for the company.
The aim of the proposed legislation is to promote a culture of entrepreneurship and reduce the stigma around corporate failure. By reducing the perceived ‘penalties’ associated with formal appointments it is hoped a better outcome will result for all stakeholders, including creditors and employees.
What directors need to know
- The protection arises due to the steps taken by a director prior to liquidation.
- The new provisions seek to allow directors additional time to formulate a plan for the company’s future where it is reasonably likely that the company can trade and or restructure its way out of difficulties.
- If pursuing a later insolvency is a better outcome than an immediate insolvency, Safe Harbour will protect directors who pursue that course.
- The better outcome test will require a comparison of the cents in the dollar return to creditors in an immediate insolvency versus a later insolvency much like an assessment a voluntary administrator makes of a Deed of Company Arrangement versus liquidation.
When is Safe Harbour protection available to directors?
There are very strict rules around when Safe Harbour is available to directors. The Safe Harbour protection is only available while directors:
- develop or take a course of action that, at the time, was reasonably likely to lead to a better outcome for the company than immediate administration or liquidation (the course of action that is developed must be implemented within a reasonable period);
- ensure that the company complies with its obligation to pay its employees (including their superannuation);
- ensure that the company meets its tax reporting obligations; and
- have met their obligations to assist administrators, liquidators and controllers and provide them with company books and records and a Report as to Affairs.
What is meant by a better outcome for the company?
A better outcome for the company is an outcome that is comparatively better than the immediate appointment of an Administrator or Liquidator. It is unclear but it may mean a better outcome for all stakeholders including creditors both existing and new.