An overview of new insolvent trading Safe Harbour for directors

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.

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What should a better outcome assessment look like?

  • Clearly identify the assumptions made and document the information relied upon to conclude the outcome would be better.
  • Explain why the plan is objectively likely to result in a better outcome than an immediate insolvency.
  • Provide a clear set of steps required to implement the proposed course of action and a timetable of milestones that are capable of objective assessment.
  • Continue to monitor and document the outcome of the proposed course of action.

When will Safe Harbour take effect?

The protection will take effect as soon as the director starts to take a course of action to avoid the company becoming insolvent or achieving a better outcome. The protection will stop if:

  • the course of action is no longer reasonably likely to lead to a better outcome; or
  • the company goes into formal administration (including receivership).

How can you demonstrate that a course of action will lead to a better outcome for the company?

Indicative factors to be considered in determining whether a course of action was reasonably likely to lead to a better outcome relate to whether a director has:

  • kept themselves informed about the company’s financial position;
  • taken steps to prevent misconduct by officers and employees of the company;
  • taken appropriate steps to ensure the company maintained appropriate financial records;
  • obtained advice from an appropriately qualified adviser; and
  • been taking appropriate steps to develop or implement a plan to restructure the company to improve its financial position.

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