Entering a safe harbour – part two

By in Accounting and Finance, Business Trends

Following on from part one in this series; where we discussed meeting the criteria of Safe Harbour and developing a plan that was ‘reasonably likely’ to lead to a ‘better outcome.’ This month, we discuss what this means and why it’s critical to get appropriate advice when implementing your organisations plan, so you can take to protect yourself from personal civil liability.

What is a ‘Better Outcome’?

 A ‘better outcome’ is defined as one which that is better for the company than the immediate appointment of an administrator, or liquidator, of the company. A ‘better outcome’ could, among other things, take into consideration:

  • The effect on the company’s creditors (likely a primary consideration);
  • The ongoing employment of staff;
  • Flow on effect to suppliers and customers;
  • The public interest; and
  • Effect on other related entities or stakeholders.

What a plan actually looks like will vary between companies and its complexity is likely to be commensurate with the size of the company and the extent of its concerns. As in all turnaround and restructuring scenarios, within the bounds of the law, there is no set path a business must follow to improve its position to achieve its purpose. A Safe Harbour plan may be as straightforward as entering negotiations with creditors for some breathing space on credit terms or seeking additional capital to move to the next phase of a business plan. Conversely, a Safe Harbour plan could be highly complex involving detailed reports and plans prepared by teams of advisors, both internal and external, with detailed measures of success and multiple contingencies if circumstances change.

There is no silver bullet to turnaround a business and Safe Harbour is no exception to the rule so directors should always ensure they receive appropriate advice to give them the best shot at success and the best protection from personal liability in the process.

Implementation

Directors need to implement and maintain a course of action, subject to any adjustments along the way, in order to achieve protection under Safe Harbour. As there are no restrictions on stakeholders taking punitive action against a company employing Safe Harbour, an appropriate level of engagement and communication with those affected is likely to be critical for the unimpeded success of the plan. An appropriate level of communication with creditors will mitigate the risk of unexpected debt enforcement action.

 Getting Appropriate Advice

588GA(2)(d) states that, when considering whether Safe Harbour applies to a director, regard may be had to whether advice has been obtained from an appropriately qualified advisor.

Caution needs to be exercised by directors to ensure legitimate advice is being obtained. Unscrupulous advisors may target directors of failing business and provide advice on shifting assets and liabilities between entities under value – this may amount to phoenix trading or breaches of directors’ duties.

When choosing an advisor, consideration should be given to:

  • The nature, size, complexity and financial position of the business;
  • The advisor’s independence, professional qualifications, good standing and membership of appropriate professional bodies (eg. ARITA, TMA, CAANZ, CPA, Law Society, etc.);
  • Advisor’s experience;
  • Whether the advisor adheres to a code of conduct;
  • The advisor’s reputation and trustworthiness; and
  • Whether the advisor has an appropriate level of professional indemnity insurance.

The advisor must also be provided with sufficient information to advise on possible courses of action.

What if Safe Harbour Plans Fail?

 If, during the implementation of a Safe Harbour plan, it becomes apparent that a ‘better outcome’ will not be achieved then appointment of an administrator or liquidator should occur. If the company enters external administration then the party bringing an insolvent trading proceeding under s588G(2) of the Act has the burden to show that the course of action taken by a director was not reasonably likely to lead to a better outcome. Somewhat contradictory, the burden of providing evidence supporting Safe Harbour will rest with the director or holding company, so it is important that proper evidence of the directors’ decisions and actions has been maintained.

If all of the qualification criteria and requirements of the Act continue to be met throughout the course of the Safe Harbour plan then the directors will not be held personally liable for additional creditor debt incurred during that process notwithstanding its subsequent failure.

Whether the Safe Harbour provisions of the Act will actually lead to increased innovation in Australia and a reduction in terminal insolvencies is yet to be seen and the Government will be conducting a review of the effectiveness of the legislation around September 2019 to assess the measures of its success. At the time of preparing this article there have not been any proceedings brought to Court to test any elements of the legislation or qualification criteria mentioned above but those cases are likely to flow in the near future and we will be monitoring them closely for more guidance on what a plan needs in order to provide directors the intended protection from personal liability.

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This article covers legal and technical issues relating to safe harbour legislation in a general manner and is intended for information purposes only. This information should not be taken as constituting professional advice and William Buck is not liable for any loss caused, whether due to negligence or otherwise arising from the use of, or reliance on, the information provided directly or indirectly in this article. It is recommended that further advice be sought prior to taking action on any specific issues dealt with in this article.

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