Australia’s insolvency laws have long discouraged responsible restructuring by company directors. When balancing the potentially significant personal liability in breaching the director’s duty to prevent insolvent trading against the company’s risks in trading its way out of distress, directors have tended to head for safety in appointing a voluntary administrator, or even placing the company into voluntary liquidation. The problem is, appointing an insolvency professional too early can destroy different kinds of value. With assets sold off in a firesale and investors’ returns in your company lower, that intangible but powerful goodwill is all but gone. And at the broader level, the sort of entrepreneurial activity that helps economies flourish is discouraged. New ‘safe harbour’ provisions in the Corporations Act 2001 are designed to encourage company directors to consider restructuring a company rather than placing it into voluntary administration.

What is safe harbour?

The safe harbour provisions effectively give you a break from the insolvent trading provisions in the Corporations Act for the time during which you attempt to restructure or otherwise turn around your business. It means it’s safe to run your company without worrying about a potential claim against the directors for insolvent trading. The safe harbour rules promote a culture of restructuring by encouraging you to: retain control of your company, rather than hand it over to a voluntary administrator consult your stakeholders and investors at the earliest indication that insolvency looks possible determine a specific and reasonable plan to rescue the company.

When does a company need to consider safe harbour?

The time to consider safe harbour is as soon as a director suspects their company may shortly face a situation of insolvency. Safe harbour requires a company to meet a number of prerequisites and applies only on the condition that you develop a course of action that is reasonably likely to lead to a better outcome for your company.

Safe harbour is a temporary location

The period of safe harbour ends when a director:

  • fails to implement the rescue plan in a reasonable period of time
  • does not recognise that the proposed course of action will be unlikely to achieve the desired better outcome
  • appoints a voluntary administrator or liquidator.
So what is a ‘better outcome’?

The legislation defines ‘better outcome’ as ‘an outcome that is better for the company than the immediate appointment of an administrator, or liquidator, of the company.’ The law lists five factors used to assess whether or not a director’s course of action is likely to lead to a better outcome. They are whether the director is:

  • properly informed of the company’s financial position
  • taking proper steps to prevent misconduct within the company that could hinder the company’s ability to repay its debts
  • ensuring the company is keeping records appropriate to its size
  • obtaining advice from an appropriately qualified entity (such as a lawyer, accountant or restructuring professional) who has sufficient information to give such advice
  • developing or implementing a plan for restructuring the company to improve its financial position.

In order to meet the strong standard of evidence a better outcome requires, it’s essential that you obtain advice and prepare a detailed plan for restructuring your business.

What if it’s worse?

It’s entirely possible that a director’s proposed course of action results in a worse outcome for the business than if an insolvency professional had been appointed in the first place. But as long as the director’s plan – at the time of making the decision – was likely to lead to a better outcome, the safe harbour provisions will still apply to additional debt incurred during that time. Effectively, you’re safe to fail.

Navigate skilfully

If you’re a director concerned about your company’s solvency or are considering appointing a voluntary administrator, why not discuss alternative options? A distressed business means challenging times personally as well as financially, which is why an objective adviser experienced in restructuring will be a valuable member of your team. Talent and vision have got you this far. But a great strategy will help you achieve your business goals. Call us to discuss how we might play a role on your team.