On 11 September 2017, the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017 passed through the Senate. On 18 September 2017 the Bill received royal assent and Safe Harbour came into effect the next day (on the 19 September 2017 – the accompanying ipso facto reforms are not yet to commence for another 6 months following royal assent).
The Government has been seeking to strike a more reasonable balance between the protection of creditors and encouraging directors to be innovative and take greater risks. The current regimes (for examples the Part 5.3A Voluntary Administration procedure and Schemes of Arrangement) were deemed to be costly and inaccessible to the SME market. Safe Harbour is intended to encourage entrepreneurs and honest directors; permitting them to retain control of a financially distressed company by taking reasonable steps to trade out of difficulties.
Safe harbour from insolvent trading is applicable where directors initiate one or more courses of action that are reasonably likely to provide a better outcome for the company than liquidation or administration. Safe harbour provides protection for directors from insolvent trading liability arising out of debts that are incurred directly or indirectly in connection with the implementation of restructuring or turnaround strategies.
The Bill states that a director enters safe harbour upon the development of one or more courses of action that is reasonably likely to lead to a better outcome for the company.
In determining ‘better outcome’, the following factors are considered:
- directors were properly informed about the company’s financial position
- steps were taken by directors to prevent misconduct by the company’s officers and employees
- steps are taken to ensure appropriate financial records are maintained
- the restructuring and turnaround strategies were designed to improve the company’s financial position
- the directors obtained advice from an appropriately qualified adviser (who was given sufficient information to give the appropriate advice)
There were two key amendments rejected by the Senate at the eleventh hour. Safe Harbour will be a ‘carve out’ rather than a ‘defence’. Also, the appropriately qualified adviser does not need be a registered liquidator. This is a critical factor in that the burden of proof to challenge safe harbour lies with a liquidator. (or any other party claiming Safe Harbour didn’t apply).
There are important parameters for directors in entering safe harbour:
- employee entitlements must have been paid as and when due;
- tax returns or other documents required by taxation laws have been submitted; and
- the books and records of the company must be adequately maintained, current and accurate.
With regards to SMEs, safe harbour makes the option of a ‘true turnaround’ a viable option for company directors:
- There is no obligation for a director to make safe harbour disclosures (whereas this will remain in place for listed companies under their continuous disclosure obligations).
- The provisions provide scope for directors to manage their own company affairs; enabling all struggling companies to explore restructuring options in a bid to regain sustainability.
- With regards to angel investors, safe harbour should alleviate the reluctance of investors who may now take on roles as directors as the risks associated with unintentional breaches of insolvency law are mitigated.
- Similarly, charities and NFP board members (who often take on fiduciary roles on a pro bono basis) may continue to act in their roles without fear of personal liability of insolvent trading.
- Where a board resolves to restructure a company’s executive team, the incoming executive officers can implement safe harbour to ensure protection against actions taken by previous management.
- There is an extension that provides safe harbour to the holding company of an insolvent subsidiary.
In essence, safe harbour permits directors of an insolvent company to incur credit or make asset purchases provided they are acting in manner ‘in so far as’ is beneficial to the company’s restructuring and turnaround strategies. This is provided it is reasonably expected to lead to a better outcome.
For SMEs, an enormous benefit is the significant cost saving, lack of disruption and stigma that would otherwise occur through the voluntary administration process. The greatest aspect of safe harbour is that directors can confidently gain comfort knowing that the new law provides protection against insolvent trading exposure.