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PKF Australia

Accountants and Business Advisers

Safe Harbour Legislation

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Tom Lesnikowski

Principal

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Safe Harbour Legislation

The Senate Economics Legislation Committee recently concluded the following:

By encouraging Company Directors to take responsible and measured steps to turn around businesses in financial distress, the committee is confident that the reforms in the bill will support effective company restructuring and, in turn, promote innovation and entrepreneurship for the benefit of all stakeholders, and the Australian economy overall,”

What is Safe Harbour?

On 11 September 2017, the Senate passed the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill that has the effect of drastically changing Australia Insolvent Trading laws. The passage of this Bill gives Directors protection from personal liability for insolvent trading and provides a better opportunity for struggling Companies to restructure.

The underlying aim of the Safe Harbour is to achieve a better outcome for the Company and have an opportunity to explore various turnaround strategies rather than immediate appointment of Liquidator or Voluntary Administrator.

What is a Better Outcome?

Section 588GA of the Corporations Act defines a “better outcome" as: 

“for the Company, means an outcome that is better for the Company than the immediate appointment of an Administrator, or Liquidator, of the Company.”

How does Safe Harbour operate?

Pursuant to the new section 588GA of the Corporations Act, Directors will not be personally liable for the debt of the Company and can rely on the Safe Harbour protection where they are developing courses of action which are reasonably likely to lead to a better outcome for the Company than Administration or Liquidation.

The following elements that need to be considered when determining whether course of action is “likely to lead to a better outcome”:  

  • The Company must maintain accurate books and records that would allow Directors to be properly informed of the Company’s financial position at all times. It is essential that during the Safe Harbour that financial information and progress reports are circulated and filed.  
  • It is crucial that independent legal and financial advice is sought from qualified professionals in respect of restructure at an early stage when the Directors start to suspect the solvency issues.
  • The turnaround plan addressing the issues of the Company must be developed and documented. The turnaround plan must set out a clear course of actions the Company must take to improve its financial position and achieve a better outcome.
  • The appropriate steps must be taken to prevent any misconduct by the Company’s officers or employees.

Importantly, the Safe Harbour will not apply where certain legal requirements are not complied with. To be able to make out a defence under the Safe Harbour provisions, the Company:

  • Must be compliant with the tax reporting obligations at all levels (Federal and State);
  • Must be able to pay all employee entitlements, including superannuation, as and when they fall due.

It was previously proposed for the Safe Harbour to extend for a period of up to five years. However, the current legislation does not provide a fixed timeframe as to the length of the Safe Harbour. The timing for turnaround plan must be reasonable, depending on the circumstances of each restructure, the nature, size and complexity of the business.

In the circumstances when the Company is not able to turn-around and the conditions for the Safe Harbour cannot be maintained, the Directors should consider proceeding to Voluntary Administration or Liquidation.

Undoubtedly, the Safe Hharbour reform will have a significant effect on insolvent trading regime, in particular the attitude of Directors. We expect Directors will now become more encouraged to consider corporate reconstruction plans to address their financial issues. The reforms will at a future date be no doubt tested by the Courts, making it critical for Directors to take a proactive and clearly documented approach when seeking to afford themselves a “Safe Harbour”.

Watch this space in the next edition of Pulse for an update on Ipso Facto reform.


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