Australian Safe Harbour Provisions

Australian Safe Harbour Provisions: Your Key Questions Finally Answered

In September 2017, a new piece of legislation known as the Safe Harbour provisions was added to the Corporations Act. Safe Harbour provisions give company directors protection from insolvent trading penalties and an opportunity to pursue strategies that could save their struggling business.

When enacting the Safe Harbour legislation in September 2017, the government said it aims to foster a business culture of entrepreneurship and move away from an environment that penalises business failure.

If a company is insolvent or there are reasonable grounds to believe the company is or will become insolvent, a director must prevent the company from incurring debts. Safe Harbour is a protection for the directors personally - not the company - from criminal and civil penalties and debts incurred if the company continues trading while insolvent.

To qualify, directors need to

• be closely monitoring and involved in the financial position of company and have: -

  • Paid employee entitlement on time; and

  • Have appropriate financial records which are kept up to date; and

  • Ensure no misconduct by officers and employees; and

  • Kept and maintained tax reporting records and obligations.

• develop a course of action that is reasonably likely to lead to a better outcome.

The legislation does not define ‘reasonably likely’ or ‘better outcome’ nor has there been a judicial interpretation or any legal precedents set. However, it is generally considered that an objective assessment is needed of the course of action to determine if it is reasonably likely to lead to a better outcome.

Safe Harbour starts when a director suspects that the company may be insolvent and starts developing one or more courses of action that are reasonably likely to lead to a better outcome for the company than the immediate appointment of an administrator or liquidator.

Safe Harbour ends if the director

• stops taking a course of action, or

• the course of action becomes reasonably unlikely to lead to a better outcome, or

• the director does not begin the reasonable action after a reasonable period

During a Safe Harbour, the board and management remain in control of the company - not an Administrator or Safe Harbour advisor. The Safe Harbour advisor is just that: an advisor, there to advise and guide.

Entering Safe Harbour is not a formal insolvency action such as voluntary administration or liquidation. There is generally no adverse consequence of entering Safe Harbour. This means it will not usually trigger a notification to the bank under the insolvency terms of the borrowing agreement, and you are not required to disclose the Safe Harbour to anyone. However, if you are a director of a public company, there are some circumstances where you may need to disclose the insolvency and Safe Harbour under the continuous disclosure requirement.

Safe Harbour provisions do not give directors a free pass to do what they like. All the other director duties - such as acting in good faith and the best interests of the company - still apply.

While Safe Harbour is intentionally flexible, I recommend taking appropriate advice sooner rather than later to get the best outcome. If there is significant uncertainty about the company’s solvency, directors should avail themselves of the Safe Harbour provisions now bearing in mind that Safe Harbour applies to debts incurred in connection to the Safe Harbour restructuring plan.