The safe harbour laws, which commenced on 19 September 2017, aim to 'facilitate more successful company restructures outside a formal insolvency process where doing so would achieve a better outcome for the company than immediately appointing an administrator or liquidator'. Under this reform, directors are only liable for debts incurred while the company was insolvent where it can be shown that the director was not developing or taking a course of action that at the time was reasonably likely to lead to a better outcome for the company.
The "safe harbour" provisions are found in Section 588GA of the Corporations Act 2001.
Typically under the insolvent trading provisions in s 588G(2) of the act, directors are personally liable for debt if:
- They are a director at the time the debt is incurred
- The company is insolvent at that time or becomes insolvent as a result of the debt incurred.
Under the safe harbour provisions, s 588GA(1) excludes directors from this liability if:
- 'at a particular time after the person starts to suspect the company may become or be insolvent, the person starts developing one or more courses of action that are reasonably likely to lead to a better outcome for the company; and
- The debt is incurred directly or indirectly in connection with any such course of action during a specified period of time.'
It is important to note that the director 'bears an evidential burden' regarding the development of a course of action which is likely to lead to a better outcome. In working out the course of action the director must:
- Properly inform themselves of the company's financial position;
- Take appropriate steps to prevent misconduct of employees or officers which may affect their ability to repay debt;
- Take appropriate steps to ensure the company is keeping appropriate financial records;
- Obtain advice from an appropriately qualified entity who has been given sufficient information to give appropriate advice;
- Develop or implement a plan for restructuring the company to improve its financial position.
Further to this, it is important to note that safe harbour provisions do not apply if debt is incurred and the company is failing to:
- Pay the entitlements of the employees by the time they fall due
- Give returns, notices, statement, applications or other documents as required by taxation law.
- Ensure outstanding employee entitlements are paid and future entitlement obligations can be met as and when they fall due.
- Ensure all reporting obligations are being met.
- Ensure there are no outstanding issues surrounding the misconduct of employees or officers.
- Ensure all insurance policies are adequate and up to date.
- Ensure that prior to incurring any further company debt, there is an initial assessment of what actions will lead to a better outcome e.g. continue operations or appoint administrator. Seek appropriate advice.
- After initial assessment, if continuing operations would lead to a better outcome begin developing a restructuring plan, carefully recording and archiving relevant documents.
- Place the discussion of financial records, financial position and plan to be implemented on the agenda of board meetings.
- Continually assess if the chosen action is leading to a better outcome. Get updated advice if necessary.
- If placed into formal insolvency, directors must ensure compliance.
If you would like further information regarding Insolvency "Safe Harbour" provisions please contact Brentnalls SA for a no obligation chat.
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The information provided in this information sheet does not constitute advice. The information is of a general nature only and does not take into account your individual situation. It should not be used, relied upon, or treated as a substitute for specific professional advice. We recommend that you contact Brentnalls SA before making any decision to discuss your particular requirements or circumstances.