This article looks at the often-unutilised safe harbour provisions available to company directors. If you are a director and struggling to pay your creditors debts as and when they fall due, there are a number of options available to you. Today we look at the safe harbour provisions which can be invoked to offer protection to directors from insolvent trading claims and other potential breaches of the corporations act 2001.
The Safe Harbour Regime for Company Directors
The Safe Harbour insolvency regime allows company Directors protection from insolvent trading personal liability and allows them the ability to implement a restructure of the company without the risk (and stress) of personal liability for debts, should the restructure fail. In short, the regime is designed to allow company Directors the freedom, under supervision by an authorised practitioner, to take measured risks and to continue being able to trade their business out of financial difficulty rather than immediately going to external administration.
The regime is intended to encourage company Director’s who are willing to take early action in the form of proactive steps to restructure their companies in an attempt to potentially avoid more formal insolvency structures. These include obtaining expert advice or preparing a turnaround plan that would eventuate in a better outcome than an insolvency appointment might.
Legislative Provision
Section 588GA of the Corporations Act 2001 (Cth) (The Act) outlines the Safe Harbour defence, entitled “Safe Harbour – taking course of action reasonably likely to lead to a better outcome for the company” outlines the requirements to be eligible to use the Safe Harbour Defence.
What Should Directors do?
Simply keep a close eye on the financial position of the company and at the first sign of not being able to pay your debts as and when they become due and payable, you must ensure to take proactive steps to seek legal and financial advice from an experienced restructuring and turnaround adviser, for example, a member of ARITA or TMA australia.
Proof of the steps taken is essential in proving a safe harbour defence. Equally essential is that the books, records and some key liabilities of the company are in order. Without this, it is difficult to ascertain where money is coming from and going to. This is outlined in note 1 of section 588GA of the Act.
The further advantages of taking steps early on is that banks and other key stakeholders are more likely to support a borrower they can see has actively taken steps to be proactive and engage with them. If there is confidence placed in the directors and their advisers, it would follow that they would engage more constructively to come to a meaningful solution.
Turnarounds and restructuring are complex and often take time to develop and implement. That is why it is essential that expert advice is obtained as early as possible. In a time when finances would be particularly tight, this may be challenging. However, securing the relevant advice from a professional is important as the law may deny you the safe harbour if you have not engaged an appropriately qualified adviser.
Act Early
The importance of acting early and taking proactive steps is paramount in establishing a safe harbour defence. Engaging qualified advisers who specialise in turnaround and restructure plans is important. Although this can be an anxiety inducing time, acting early will help to lift the stress associated with this time and will help not only directors but their companies in times of financial difficulty.