Safe Harbour – Common Questions and Misconceptions

Cometh the crisis, cometh the legislation


The much talked about safe harbour provisions of the Corporations Act 2001 (Cth) are about to be finally put to the test as a result of the current unprecedented crisis impacting many Australian businesses.


From a high level the safe harbour regime is designed to encourage directors in distressed or near insolvent situations to formulate a plan (or plans) that is reasonably likely to deliver a better outcome for the company than an immediate administration or liquidation.


The purpose of the regime is to allow directors the ‘breathing space’ to formulate a plan of action to preserve the business without the fear of potential insolvent trading liabilities and to avoid (as far as possible) the need to enter into voluntary administration.


In this article we wanted to focus on the common questions and misconceptions about safe harbour based on real time conversations we are having.


Over the course of the last week our Restructuring and Insolvency team has had multiple conversations with boards and advisors about safe harbour. There remains confusion about what safe harbour is, what protections it affords and how it operates.


Who or what can enter the safe harbour

The safe harbour is a protection for directors personally not the company.


Sooner rather than later

We would recommend the directors consider the safe harbour and take appropriate advice now given the global uncertainty. If there are any concerns or doubts about future financial performance the directors should look to avail themselves of the potential protection sooner rather than later. The safe harbour applies to debts incurred in connection with the safe harbour action plan.


No adverse consequences

Generally speaking there are no adverse consequences for entering into safe harbour. Appropriate due diligence needs to be undertaken to ensure there are no unintended triggers in a finance document however provided the company is still able to pay its debts as they fall due and no action has been taken to suspend payments, appoint an insolvency practitioner or reschedule its debts, the commencement of safe harbour would not, in and of itself, trigger the insolvency or insolvency proceedings events of default under most standard loan facility documentation. A company that has finance documents with credit funds or other non-bank lender may need to carefully review their finance arrangement and seek appropriate advice.


What does it protect

Directors that successfully rely on the safe harbour will not be held personally liable for any debts incurred directly or indirectly in connection with such a course of action or plan developed to achieve a better outcome.


Not a formal insolvency process

Entering into safe harbour is not a formal insolvency process.


Flexibility

The safe harbour regime is intentionally flexible. There are criteria outlined that will be taken into consideration when considering if the protections apply, however it is designed to be able to be tailored to the individual business or issues which it must address.


Hurdles

Albeit the safe harbour is flexible there are two critical ‘hurdles’ a company must overcome before the directors can avail themselves of the safe harbour, namely:

  • pay all employee entitlements when they fall due; and

  • compliance with all tax reporting obligations.

Criteria

The following non-exhaustive list outlined in the legislation is often cited as being a starting point for entry into the safe harbour. Each of the directors seeking to rely on safe harbour should:

  • properly inform themselves of the company’s financial position (for example, accessing the company’s latest financial information to assess the feasibility of a given course of action);

  • take appropriate steps to prevent any misconduct by other officers or employees that could adversely affect the company’s ability to pay all its debts;

  • take appropriate steps to ensure the company maintains appropriate financial records consistent with the size and nature of the company;

  • obtain advice from an appropriately qualified entity (commonly known as the safe harbour advisor) who is given sufficient information; and

  • assist in developing and implementing a plan or course of action for the company to improve its financial position.

Board remains at the wheel

During the safe harbour the board and management remain in control of the company – taking advice as required. There is no displacement of power or normal functions (outside delegation that may be undertaken).


Role and powers of the Safe Harbour Advisor

The safe harbour advisor is just that, an advisor. There to guide, advise and provide a sounding board for the board particularly in formulation of the course of action or plan to achieve a better outcome.


Better outcome

The better outcome test will require a comparison of the cents in the dollar return to creditors in an immediate insolvency versus the proposed outcome of the plan (be it going concern of otherwise). This analysis is similar to the liquidation analysis undertaken as part of preparing an administrator’s report. Arguably however the analysis must go further and require an assessment of the impact on other stakeholders, such as employees and shareholders.


Public announcements

In revised ASX Guidance Note 8, the ASX has indicated that it does not require a company to disclose to the market that its directors intend to rely on the safe harbour regime to develop a course of action which would result in a better outcome than a formal insolvency process.


D&O policies

The entry into safe harbour by a director will generally not be caught by the exclusions generally associated with insolvency or insolvent trading. We would however recommend careful review of the individual policy as part of any safe harbour considerations.


Documentation

Given the evidentiary burden is on the director to show they had the benefit of safe harbour we would recommend there be evidence of the board’s thinking around and consideration of safe harbour (including if appropriate entry into the safe harbour).


For more information on safe harbour or advice on insolvency, distressed debt and restructuring generally please contact Nick Edwards (Nicholas.Edwards@hamiltonlocke.com.au), Zina Edwards (Zina.Edwards@hamiltonlocke.com.au) or Brit Ibanez (Brit.Ibanez@hamiltonlocke.com.au). The Hamilton Locke restructuring and insolvency team have a broad range of top-tier experience acting for a variety of stakeholders in distressed scenarios including directors and companies.

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