Company directors can now obtain protection from insolvent trading personal liability.
Under new Australian laws introduced in September 2017, directors of Australian companies whose businesses are experiencing financial difficulties, can now obtain protection from insolvent trading personal liability.
Safe harbour is not a type of appointment under the Corporations Act 2001 (Cth) and is, therefore, not made public (even where listed, subject to provisions).
The best time to obtain this protection is when it is first suspected that the company is insolvent or likely to become insolvent.
The company must meet certain criteria and be prepared to develop one or more courses of action that are reasonably likely to lead to a better outcome, than the immediate appointment of an administrator or liquidator to the company.
There is an expectation that accountants and lawyers be aware of new safe harbour provisions so that they can identify if their clients are potentially eligible for safe harbour protection.
To be confident in Safe Harbour protection the director should ensure...
The company has received advice from an appropriately qualified professional who is able to form a view that enacting safe harbour will result in a better outcome for the company than liquidation or voluntary administration:
- A turnaround practitioner, who is qualified and has extensive experience in operational and financial turnaround is well placed to provide this advice.
- A turnaround plan should be developed where one or more courses of action are reasonably likely to produce a better outcome.
1. To qualify for Safe Harbour the threshold conditions must be met:
- fully compliant with its tax reporting obligations (not necessarily paid);
- able to pay employee entitlements;
- maintain appropriate books and records.
2. How long does Safe Harbour last?
Safe harbour protection is available from the point in time when the directors start developing one or more courses of action.
There is no specified duration to safe harbour protection provided the company continues to work towards an outcome that was reasonably likely to provide a better outcome than formal insolvency.
The turnaround plan and initiatives may change and develop over the course of safe harbour protection.
We recommend that a monthly meeting is held to:
- confirm that the turnaround plan is being implemented;
- revisit the plan to test that it is still valid to achieve a better outcome;
- confirm statutory reporting obligations are being maintained; and
- ensure appropriate records are being maintained.
3. How to identify if a director needs Safe Harbour protection.
This is should come as great news to directors as it means that they can seek help as soon as the financial position begins to deteriorate.
It is important for advisors to communicate with directors if they become aware of any circumstances that may warrant safe harbour protection such as:
- Declining earnings or sales;
- Difficulty in meeting outstanding tax obligations;
- Tight cash flow & inability to pay wages;
- An expectation that the next big job/sale/contract will save the company;
- Pressure from creditors & legal demands;
- Breach of lending covenants;
- External factors, market changes & increas/ed competition or disruption.
4. To be confident Safe Harbour protection continues to apply:
- document the engagement of an appropriately qualified turnaround practitioner;
- confirm the threshold conditions are being satisfied;
- receive formal recommendations on Safe Harbour process; and
- ensure directors continue to resolve at meetings that Safe Harbour purpose is being progressed and remains appropriate.
Safe Harbour for Start-ups - Innovation, Compliance & Growth
Valley of Death – Risk of Directors Insolvent Trading Personal Liability / Loss of Seed Funding
- The University of Melbourne estimates nearly 97% of startups exit or fail to grow (businesses less than 2 years old). So perilous, this initial phase is frequently referred to as the ‘Valley of Death’.
- Funding challenges contribute at this early phase. Entrepreneurs often suffer demoralisation as the novelty wears off and self-doubt creeps in. This can be an emotionally draining time for all.
- Successful transitioning requires a combination of strategic planning, successful proof of concept, business & leadership coaching, resilience & discipline, systematic use of technology and, importantly, support from professional advisors.
Defining Effective Growth Strategy – Directors Risk Personal Liability / Stakeholders’ Risk
- Melbourne University further states that of the startups that survive beyond two years, 77% of all economic benefits will be created by just 3% of startups that become high growth firms.
- Usually attributed to a range of factors that so often impede business growth. For example, lack of adequate information management systems, failure to effectively market, compliance breaches, inadequate risk management, a failed product launch, director/shareholder disputes, poor organisational culture, transition of a family business, theft of IP or a cyber-attack (etc).
- In refining the business model for expansion, there presents multiple and complex issues. Aligning strategic vision, maximising resources and making use of professional and industry advisors commonly results in learnings that hold the key to ultimate success.
- Turnaround is defined as the ‘sustainable recovery of an underperforming business’ (Michael Fingland 2018, CEO & Executive Director at leading turnaround firm Vantage Performance). An independent business review can be undertaken at any stage throughout the startup cycle. Safe Harbour protects directors from insolvent trading personal liability but also provides ‘breathing space’ to facilitate a strategic restructuring and turnaround (it is not made known to the public).
- Provided directors remain compliant and continue to work towards an outcome that is reasonably likely to provide a better outcome than formal insolvency, there is no time limit on how long a company can stay in Safe Harbour. This allows a range of options to be explored.
- In addition to directors, key stakeholders such as investors, lenders, financiers and suppliers also benefit from Safe Harbour as they take comfort in the statutory compliance requirements bestowed upon directors. A Turnaround Practitioner can provide ongoing progress reports to demonstrate directors remain compliant, focused on the strategic restructuring and, therefore, safely within the Safe Harbour.
- Informal Workout or 'Safe Harbour' Turnaround
The directors remain in full control of their company (directors agree the fees of the turnaround practitioner).
- Voluntary Administration or Liquidation
The registered liquidator will take over control of the company (fees and expenses are drawn from the company's assets, on creditor approval).
Safe Harbour for Directors Protection - In Practice
~ Protect or mitigate against insolvent trading personal liability. Breathing space for directors, stakeholders and management to protect against the consequences of the business failing or prematurely entering liquidation.
~ The breathing space minimises any potential for a future Liquidator (if one appointed) to attack directors and management’s decisions.
~ Once Safe Harbour is entered into, any new directors appointed are protected from insolvent trading personal liability so that the strategic restructuring and turnaround plan can be implemented.
~ New business ventures and start-up companies. Safe Harbour can be implemented upon commencement to protect against losses made in the initial years. Ongoing supervision by a Turnaround Practitioner ensures directors remain compliant and within the Safe Harbour. Reports provided to stakeholders (PE, VC, financiers etc).
~ Charities and Not-For-Profit companies can enter Safe Harbour as a precautionary measure where there is uncertainty about the financial position (for example, protecting non-executive directors offering services on pro bono basis).
~ Safe Harbour is not a formal insolvency appointment under the Corporations Act 2001 (Cth) and there is no requirement for it to be made public (creditors do not need to be notified).
Some Professional bodies at the forefront of these reforms...
Safe Harbour for directors, passed through both houses of Parliament on 12 September 2017 to be given royal assent. Safe Harbour is a 'carve out' and advisory may only be undertaken by an appropriately qualified entity or professional. Read more here.
- The Australian Institute of Company Directors had long advocated for the legislative reform which is designed to encourage innovation, risk and sustainable economical growth.
- The Turnaround Management Association (Australia), also strong advocates of the legislative reform, published Best Practice Guidelines – Navigating Safe Harbour.
- In July 2017, whilst still in consultation, Lachlan Edwards, the President of the Turnaround Management Association, and Marcus Derwin, Director, were interviewed for an article which appears in the July edition of the Australian Institute of Company Directors Magazine on the proposed Safe Harbour reforms to Australian insolvency laws.
ARITA Dual Certification - Advanced Insolvency and Advanced Restructuring & Turnaround
Partner & Turnaround Practitioner Eddie Griffith was the first professional in South Australia to achieve ARITA's Advanced Dual Certification, and was awarded Highest Mark Certificate for the Advanced Restructuring & Turnaround Certification in 2016 debut.
The new safe harbour laws state that directors seeking the protection of a safe harbour must appoint an appropriately qualified entity. ARITA’s university (UTS) delivered Advanced subject focuses on operational skills in driving successful turnarounds. There’s no more comprehensive restructuring qualification – and no better way to take your business recovery and advisory
Australian Restructuring Insolvency & Turnaround Association (ARITA), February 2018
Obtain Safe Harbour Advice ASAP
We provide a confidential and free initial consultation. Get Safe Harbour advice and we can provide implementation for a fixed fee.