The Legal Framework

Safe Harbour is part of the Corporations Act 2001 (Cth). It is important to understand both what the legislation provides and its limits.

Insolvent Trading

Directors have a duty under Australian law to prevent their company from incurring debts in circumstances where the company is insolvent and the requirements of the insolvent trading provisions are met.

A company is insolvent when it is unable to pay its debts as and when they become due.

This creates an important responsibility for directors. When financial pressure develops, they need to understand the company’s actual financial position and respond to warning signs rather than simply allowing further debts to accumulate.

Director Liability

The consequences of insolvent trading can be serious.

In appropriate circumstances, a director can face civil liability in relation to debts incurred while the company was insolvent. Other consequences may also arise depending on the circumstances.

That is why early recognition of financial difficulty matters.

It is also why directors facing potential insolvency should obtain appropriate professional and legal advice about their individual circumstances.

The Purpose of Safe Harbour

Section 588GA of the Corporations Act 2001 (Cth) provides a Safe Harbour from civil liability for insolvent trading in certain circumstances.

Broadly, it applies where, after starting to suspect that the company may become or be insolvent, a director starts developing one or more courses of action that are reasonably likely to lead to a better outcome for the company than the immediate appointment of an administrator or liquidator, and the relevant statutory requirements are satisfied.

The legislation therefore creates an important opportunity for eligible directors to pursue a genuine course of action directed toward a better outcome for the company.

But it is not a licence to ignore insolvency. And it is not an excuse to simply continue doing what the business was already doing.

What the Legislation Looks For

Safe Harbour is concerned with what is actually happening.

In considering whether a course of action is reasonably likely to lead to a better outcome, the legislation identifies matters that may be relevant, including whether the director is:

• properly informing themselves about the company’s financial position;
• taking appropriate steps to prevent misconduct by officers or employees;
• taking appropriate steps to ensure the company maintains appropriate financial records;
• obtaining advice from an appropriately qualified entity; and
• developing or implementing a plan for restructuring the company to improve its financial position.

There are also important requirements concerning employee entitlements and taxation obligations which can affect a director’s ability to rely on Safe Harbour.

These requirements matter.

Safe Harbour should therefore never be approached as a passive status. A director needs to understand the company’s position, take the legislation seriously and pursue a genuine course of action directed toward a better outcome.

Behaviour, Information and Evidence

This is where the legislation and our practical work come together — but they remain two different things.

We work with directors to establish reliable financial information, identify the issues confronting the business, develop actions, implement them, measure what happens and regularly review whether the course being pursued remains appropriate.

That process also creates a contemporaneous record.

It records the information considered, advice obtained, decisions made, actions taken, financial results measured and corrections made as circumstances change.

Those records can be important in demonstrating what actually occurred during the period in which the course of action was being pursued.

They do not, by themselves, guarantee that Safe Harbour applies. Safe Harbour depends upon the legislation and the particular circumstances of the director and company.

Why Timing Matters

Financial problems rarely become easier because they are ignored.

The earlier a director identifies financial pressure, obtains appropriate advice and establishes the true position of the business, the greater the opportunity to consider the options that may be available.

Waiting can reduce those options.

Our role is to help directors bring structure to that process: establish the financial truth, understand the cash position, improve the quality of information, identify what needs to change, document the course of action and then measure the results.

The objective is a genuine one: to pursue a course of action reasonably likely to lead to a better outcome for the company while building a business that is better informed, more disciplined and more capable of dealing with its financial obligations.