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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.
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?
So what does an appropriately Qualified Practitioner need to verify?
When should a Director implement Safe Harbour?
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