14 Things we’ve learned about the 2017 Insolvency Safe Harbour

The Insolvency Safe Harbour reforms have been available to company directors for almost three years. In that time, there have been many opportunities for directors to take advantage of it. But what have we learned as a result?

The Insolvency Safe Harbour is Different to the COVID19 Safe Harbour

In response to the pandemic, the government announced the COVID-19 Safe Harbour. This was a six-month temporary relief period granted to directors so they can avoid personal liability for trading a company while insolvent in the midst of the COVID crisis. The COVID-19 Safe Harbour expires in September 2020 and there are key differences between the 2017 and COVID Safe Harbour.

2017 Insolvency Safe Harbour

There’s plenty of evidence which point to the positive outcomes that can be achieved from a well-planned and timely restructure. On countless occasions it has proven more successful, cheaper and less laborious & stressful than a voluntary administration and a DOCA (where the average cost for a small VA is $97,000 and average return to creditors is pitiful – see Mark Welland 2014 study).

However, the Insolvency Safe Harbour has brought some clarity – also a few surprises – over the previous 3 years.

Here are 14 things we’ve learned about the Insolvency Safe Harbour and its effects on companies:

1. About half of all companies seeking the insolvency safe harbour do end up in a formal insolvency process (external administration). This is probably unsurprising, given a director must have a ‘suspicion’ of insolvency before the Insolvency Safe Harbour is sought in the first place (often referred to as the ‘twilight zone‘).
2. The availability of Safe Harbour opens conversations between directors and turnaround experts much earlier (see our indicators of insolvency).
3. It is reducing (and in some cases, completely removing) directors’ personal exposure for insolvent trading.
4. It can see creditors gaining higher returns.
5. It can see smaller creditor deficiencies, which also means that there is lower exposure risk for directors where personal guarantees have been given.
6. It has many issues that are still open to interpretation because of few precedents, or a lack of information.
7. There is little consensus on such issues as: Who is the most appropriate advisor to turn to? With whom (and when!) should a company’s advisors engage with each other, such as lawyers and accountants? Definitions of ‘better outcome’ for the parties concerned – employees, secured creditors, unsecured creditors (the legislation states an ‘appropriately qualified entity‘).
8. It is being handled according to the preferences and skillsets of the advisor, and of the facts discernible in any given case.
9. It is effective in companies that are rich in assets, but poor in cash – this is very often the case with Not for Profits (NFPs) and charities (registered under the ACNC).
10. It mitigates the risk of directors’ exposure when a company is involved in a so-called ‘pre-pack’ sale, a safe harbour restructure or a legal phoenix (the Combating Illegal Phoenixing Bill 2020 includes, in addition to achieving market value, the ‘better outcome’ test under Safe Harbour as a defense to a creditor defeating disposition).
11. It is effective when a company is attempting a last-ditch sale in order to regain some liquidity or salvage some enterprise value.
12. It supports finance negotiations, and gives directors other options if their negotiations fail.
13. It is helping directors to keep going when their companies are in crisis or distress, instead of simply bailing out because it’s too hard (for example, with the COVID19 crisis…).
14. It’s a rare bird that is misusing the provisions (from what we’ve seen so far), which is an indication that the provisions are working at giving directors that desperately needed breathing space….

What does this all mean for you?

As an advisor to other businesses (a lawyer, or an accountant) it’s important to realise the potential of the insolvency safe harbour provisions. These are proving helpful and beneficial to many company directors and are enabling the recycling of businesses to sculpt viable business models. This means greater employment (jobs are saved) and sustainable growth – something which is critical for recovery of the Australian economy.

It’s worthwhile keeping the insolvency safe harbour in mind when you have conversations with directors about a distressed or crisis-point company.

By being able to open the doors to these conversations early, you will be able to reduce liability exposure for directors, improve outcomes for creditors and employees, and prevent worst-case closedowns or premature liquidations for your clients.

Now is a good time to form a relationship with an advisor you can trust

Drop me an email at eddie@turnabout.com.au – we can undertaken an Insolvency Safe Harbour review on your struggling clients and get them the protection they deserve.