Australian Insolvency: Safe Harbour Provisions

What is Safe Harbour in insolvency?

The aim of Safe Harbour, as it relates to insolvent trading in Australia, is to allow companies to be restructured without a formal business insolvency process. A set of reforms introduced in 2017 ensures company directors are not personally liable for debts incurred after the date of insolvency. This is only if they were incurred due to efforts that were  “reasonably likely” to lead to a better outcome for the company (i.e. a legitimate restructure).

Relief for Directors via insolvent trading provisions

The Safe Harbour provisions protect company directors from section 588G of the Corporations Act 2001, which holds directors personally liable in civil and even criminal law for debts incurred after the company became insolvent. 

Safe Harbour provisions: Corporations Act

The new provisions allow directors to address a company’s financial difficulties behind-the-scenes, whilst under the supervision of an “Appropriately Qualified Advisor”.

An “Appropriately Qualified Advisor” could include anyone with professional qualifications, professional indemnity insurance to cover their advice, professional qualifications and membership of an appropriate professional body.

In essence, directors have a responsibility to continually assess whether there remains a reasonable likelihood of a better outcome if the company continues trading and incurring debt.

If the corporate restructure plan doesn’t work and the organisation remains unprofitable, the company will proceed to voluntary administration or liquidation. It’s at this point that the Safe Harbour provisions come into their own; directors can submit their claim for protection under Safe Harbour for the debts that were incurred during their attempt at restructure.

How to access Safe Harbour

There are strict rules as to who can access Safe Harbour. 

It’s only available to directors who act quickly in response to declining financial performance. Acting too late could eliminate directors from Safe Harbour provisions, making voluntary administration or liquidation their only options.

Company directors who conclude that restructure is required will need to keep meticulous records. As all financial information will need to be provided to the liquidator to support the Safe Harbour defence in the event that restructure fails.

Requirements include:

• Continuing to meet employee entitlements, super and tax reporting obligations
• Being able to provide the required information should it be requested by an external administrator, and 
• Instigating actions that are reasonably likely to lead to a better outcome for the company 

In determining what was “reasonably likely”, the court will consider whether directors:

• Sought appropriate advice
• Maintained proper financial records
• Monitored the financial position of the company, and
• Took steps to prevent misconduct 

Developing a successful restructure plan

Pulling off a successful restructure can be hard to do. It requires expert knowledge and experience, as well as an understanding of Australia’s corporate insolvency laws. This can act as a barrier to businesses, especially small businesses, from entering Safe Harbour.