Safe Harbour Protection for Directors – In Practice

Support for the carve-out model – Safe Harbour

The Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill (“the Bill”) has introduced a ‘Safe Harbour’ for directors to trade out of difficulties and avoid insolvent trading personal liability.

Effective 19 September 2017, safe harbour provides protection for the directors of financially challenged companies from personal liability arising from insolvent trading.

The model adopted sets the safe harbour as a legislative ‘carve-out’ rather than a ‘defence’. There were arguments for and against each of these.

Safe Harbour – as a ‘Defence’

If safe harbour were a defence, it would mean that directors continued to have prima facie liability for insolvent trading in a subsequent liquidation, subject to their being able to establish the elements of the defence.

Critics asserted that a ‘carve out’ does not provide an adequate balance to allow for genuine recovery action and continued protection for creditors. However, the Australian Institute of Company Directors (“AICD”) reasoned that a defence model was neither appropriate, constructive, nor in accordance with common sense lawmaking. By imposing the legal burden upon directors, it would be preceding an overly strict legislative approach for which Australia’s insolvency regime is currently criticised.

The Turnaround Management Association added that a traditional defence ‘would be a cold-comfort to directors’ and pointed out that such a model would likely result in under-utilisation of the safe harbour protections.

Safe Harbour as a Legislative ‘Carve-out’

The Bill’s objective was facilitating successful restructures outside of formal insolvency.

Therefore, a carve-out was more in line with this objective – as, by contrast, it means that directors would not be liable for insolvent trading unless the liquidator or any other person taking action could establish that that the directors had failed to satisfy the safe harbour requisites.

The ‘carve-out’ model provides a level of protection for honest and diligent directors attempting to restore a company to solvency.

‘Evidential Burden’ on Directors (not such a heavy burden…?)

Directors must meet an ‘evidential burden’ in order to be entitled to safe harbour. This effectively means that company directors and holding company directors have an evidential burden to adduce or point to evidence that reasonably suggests they have been acting under safe harbour protection. This, however, shouldn’t be confused with the requirement for a ‘defence’, as discussed earlier.

An ‘evidential burden’ is appropriate and consistent with human rights because the approach is consistent with the Commonwealth Guide to Framing Offences, Infringement Notices and Enforcement Powers:

  • the information about the course of action taken and the thought process underpinning it are peculiarly within the knowledge of each respective director or holding company; and
  • it is significantly more difficult and costly for any opposing party to disprove the fact that:
    • for a company director, the director developed a course of action reasonably likely to lead to a better outcome for the company; or
    • for a holding company, the directors of the subsidiary had the benefit of safe harbour and the holding company took reasonable steps to ensure the directors of the subsidiary had the benefit of
      safe harbour.

Qualified & Appropriate to Advise – Turnaround Practitioner and….?

The legislation has been deliberately left open – it is not specified who will be an appropriately qualified entity to advise directors on Safe Harbour implementation.

The Turnaround Management Association asserted that the existing wording relating to an appropriately qualified entity ”reflects the fact that the variety of appropriate advisors to a company are as diverse as Australian businesses themselves’.

Similarly, the AICD stated that companies should be able to take advice from advisors with the appropriate skills and experience relevant to specific circumstances and turnaround requirements, irrespective of whether or not they belong to an accredited profession (e.g. registered liquidator, lawyer, accountant etc.). Also, it may be possible and appropriate for a company to appoint multiple advisers, all tasked with assisting in specific areas, and whose advices collectively inform the decisions of the board.

We agree with this point as a company’s management will often possess critical capital knowledge and industry expertise. Every turnaround requires a unique skillset – if this is not on hand, industry expertise can be sourced externally. Should additional industry expertise be required, it is useful to note that safe harbour protection will extend to interim managers, directors and officers purposely appointed for the restructuring and turnaround strategies.

The Turnaround Management Association have emphasised this point by stating that turnaround advisors range from a qualified engineer in far north Queensland with operational turnaround “know how” to an investment bank in Sydney with experience in complex cross-border restructures.

In the Turnaround Management Association’s view, the test should remain broad to allow a company to seek the advice that is right for their business.

No exhaustive list of accreditation can possibly cover the range of skill sets and practical experience which can be effectively brought to bear on a turnaround.

Smaller and Family-owned Businesses (SMEs)

The situation will differ with smaller and family owned businesses. The key points for directors in this category include:

  • Does the turnaround advisor have the requisite management, financial and legal qualifications which specialise in restructuring and turnaround?
  • Does the advisor have significant restructuring and turnaround experience? If not, can they offer industry expertise appropriate to the turnaround?
  • Is the advisor affiliated with a professional body that requires adherence to a code of ethics?
  • Does the advisor have professional indemnity insurance? If not, are they in agreement to take on a formal appointment with the company as an interim or special manager?
  • Is the turnaround advisor also sufficiently qualified and experienced in insolvency legislative practice such that they possess the expertise to minimise your risk of exposure in the event that turnaround plans fail (where the registered liquidator seeks to dispense directors safe harbour protection and makes claims of insolvent trading personal liability)?
  • Does the situation match the skillset, qualifications and experience of the turnaround advisor to be engaged?
  • Is the turnaround advisor capable of objectively challenging management’s assumptions and offer alternative (often dramatic) solutions that hadn’t yet been considered necessary by the directors and senior management?
  • Is the turnaround advisor capable of identifying knowledge gaps and willing to make appropriate recommendations or referrals where the ideal advice required is beyond their own skillset or remit?

Most importantly, the professional appointed by the directors should assist the company in achieving a better outcome for all stakeholders. This would normally equate to a turnaround practitioner automatically producing their qualifications, experience, industry expertise and skillset upon request. At TurnAbout AU, we consider ourselves to be the ‘Safest Harbour’ and are able to discuss our suitability for your scenario in a confidential consultation (completely without obligation).


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