In the current climate of business closures and decreased consumer confidence amidst the pandemic, many businesses are experiencing unprecedented financial hardship. If you are concerned about the risk of insolvency for your business, being aware of the opportunity that safe harbour provisions present could help you form a plan for the next best step for your business.

What is safe harbour provision?

As a director, you generally have a duty to prevent your company from trading while insolvent and can be held personally liable for any debts incurred while the company is insolvent if you fail to do so. As opposed to immediately going into voluntary administration and surrendering control over the company when you think the company may be insolvent or at risk of insolvency, s 558GA of the Corporations Act 2001 (Cth) provides a ‘safe harbour’ from your personal liability as a director and a chance to form a plan to recover the company’s financial position. Importantly, to access these protections you must develop a course of action that is reasonably likely to lead to a better outcome for the company.

If you are considering relying upon the safe harbour exception, there are a few important things to take into account:

The federal government passed amendments on March 24th that make safe harbour more accessible

The amendments passed take effect on March 24th 2020 and provide concessions to directors seeking to rely upon safe harbour for 6 months, or until September 23rd. The new  safe harbour law no longer require companies to be fully compliant with their taxation reporting or payment of employee entitlements in order to access the benefit of safe harbour provisions corporations act. While this change will be helpful to all businesses, it will particularly assist small-medium sized businesses who are likely to be suffering the most at the moment and are typically the least likely to be fully compliant with taxation, superannuation and other employee entitlement regimes.

You need to develop a course of action that is reasonably likely to lead to a better outcome for the company

In order to ‘develop’ a course of action, you need to move beyond the planning stage and take concrete steps towards achieving a better outcome, which means an outcome which is preferable to the likely consequences of immediately appointing an administrator. While the plan does not need to be certain to succeed, the chance of success cannot be too remote or fanciful.

Looking to the legislation itself provides some guidance as to what kind of steps need to be taken at this stage, which s 588GA(2) of the Corporations Act 2001 (Cth) suggesting that directors should adopt measures to prevent misconduct by employees that could affect debts, ensure they are aware of the company’s financial position, keep appropriate financial records, seek expert advice, and start undertaking restructuring to improve the company’s financial position.

Safe harbour only applies to debts incurred in connection with the course of action that is being taken to improve the company

While normally trading debts and exceptional expenses such as those connected to securing financial advice are ordinarily covered if they are connected to securing a better outcome for the company, the exception to liability does not cover all debts. In particular, directors will still be held personally liable for debts which were incurred for an improper proper purpose. Additionally, your ordinary directors’ duties and disclosure obligations continue to apply during this period.

The safe harbour period ends once you stop taking action that is likely to lead to a better outcome

Just as the safe harbour period commences once you start developing a course of action that is reasonably likely to place you company in a favourable position, the protection form liability ends as soon as you stop developing the course of action. Should you fail to develop an appropriate course of action in a reasonable time period you may not be able to access this protection at all. Further, circumstances may change and an action that initially seemed like a good idea may be rendered unreasonable; in which case you are no longer protected if you continue to pursue that plan of action.

Failing to hand over your company’s books to a liquidator or lodging a report about the company’s affairs with the controller of the company can have serious consequences

The safe harbour provision does not excuse directors from their ordinary disclosure requirements. On the contrary, according to s 588GA(5) directors will still be required to disclose appropriate documents to liquidators and other parties on request; a failure to do so may result in the loss of the safe harbour protection.

If you are experiencing financial hardship in your business and are concerned about personal liability and the best way to form a plan to recover, please contact David McKewin at Rouse Lawyers  on 07 3648 9900