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SAFE HARBOUR

We suggest that directors start considering the Safe Harbour provisions when a director has reason to suspect their company is approaching insolvency. Safe Harbour provides an exemption from the risk of personal liability for insolvent trading, provided certain conditions are met.

Safe Harbour aims to provide a safety net to help financially distressed businesses continue operating during a time of uncertainty to avoid unnecessary insolvencies during this crisis period.

The best thing directors can do is act early at the first signs of financial distress. Taking early and appropriate action to deal with a company’s financial difficulties will put the board in the best position to turn a company around and avoid administration and liquidation, as well as to trigger safe harbour protection, should that be necessary.

WHAT IS SAFE HARBOUR?

The Corporations Act 2001 (Cth) (‘the Act’) excuses directors who are in ‘Safe Harbour’ from being prosecuted for any accidental or inadvertent breaching of the duty to prevent their company from insolvent trading. That means if a director insolvent trades during his or her time as a director of a company, they will not be held liable and their personal assets will not be at risk from the creditors.

Ordinarily, company directors are held personally liable for certain debts which are incurred if:

  • They are a director at the time when the company incurs the debt;
  • The company is insolvent at that time, or becomes insolvent by incurring that debt; and
  • At that time, there are reasonable grounds for suspecting that the company is insolvent or would become insolvent.

The safe harbour provisions in s 588GA of the Act will provide directors with a form of defence or exception to this breach of director duty if the director can prove he or she was in safe harbour.

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FAQS

Why was Safe Harbour Introduced?

The safe harbour reforms seek to address a concern that the risk of personal liability for insolvent trading was causing directors to appoint external administrators prematurely, rather than to attempt a stable restructure. The legislation seeks to strike a better balance between creditor’s inters and encouraging directors to manage challenging financial situations in a responsible fashion. The intention of the safe harbour reforms is to encourage proactive restructuring, and to avoid formal insolvency processes.

How do I prove I was complying with Safe Harbour provisions?
Well the burden of proof falls to the director – so if you are going to claim safe harbour make sure you get professional advice from someone who is will be a reliable expert, skilled in giving evidence and competent enough to retain evidence to prove you were actually complying with the safe harbour provisions. Assume the bar to proving safe harbour will be high and get it right by choosing an honest and appropriately qualified practitioner, that will protect you should the need ever arrive.
So what does an appropriately Qualified Practitioner need to verify?
The Appropriately Qualified Entitiy (‘AQE’) needs to verify that at a particular time after the director started to suspect a company may become or already is insolvent, he or she started developing one or more courses of action that are reasonably likely to lead to a better outcome for the company. In addition, the director will need to be up to date with employee entitlements and have lodged the company’s tax returns including the business activity statements. It goes without saying that the director must be complying with all other director duties to be in safe harbour.
When should a Director implement Safe Harbour?
We suggest that directors consider safe harbour when they suspect their company is approaching a state of financial distress or the outcome of a matter may result in the company’s distress and ultimate failure. Claiming safe harbour immediately before placing a company into liquidation will not protect the director’s assets from an insolvent trading claim: action needs to be taken when the possibility of the distress is first identified. That way the director will be properly protected by keeping in place the corporate veil.

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