About Safe Harbour
The Trigger Point — Recognising the Warning Signs
Financial difficulty rarely begins with a letter from the ATO or a court document. Usually, there are warning signs much earlier.
For a director, recognising those signs matters. But there is also an important legal distinction: under section 588GA of the Corporations Act 2001 (Cth), the relevant statutory language concerns the point after a director starts to suspect that the company may become or be insolvent.
The warning signs may lead to that suspicion. They are not, by themselves, a declaration that the company is insolvent or that Safe Harbour applies.
It Often Begins with a Feeling
Long before a business reaches crisis, something often starts to feel different.
The business is still operating. There is work coming in. Customers are being served and wages are being paid.
But cash has become tighter.
You begin thinking more carefully about what gets paid and when. A supplier might wait another week. The ATO balance doesn’t clear the way it once did. A payment arrangement becomes necessary. Money expected from one customer is needed immediately to pay somebody else.
You are working just as hard — sometimes harder — but the business does not seem to be building financial strength.
At first it can be explained away:
- “It’s just timing.”
- “It’s been a slow month.”
- “That big debtor will pay next week.”
- “We’ll catch up after the next job.”
Sometimes those explanations are correct.
Sometimes they are the beginning of a pattern that needs attention.
Recognising the Patterns
ASIC identifies a range of warning signs that can indicate financial difficulty or potential insolvency. In the businesses we work with, some of the most visible signs can include:
- continuing cash shortages;
- increasing ATO debt or overdue superannuation;
- creditors being paid outside normal trading terms;
- increasing reliance on payment arrangements;
- difficulty collecting debtors;
- ongoing losses;
- difficulty obtaining finance or meeting existing finance commitments;
- incomplete or unreliable financial information; and
- relying on the next large job, customer payment or finance facility to solve the immediate cash problem.
One sign viewed in isolation may have an explanation.
Several signs occurring repeatedly deserve attention.
When the Legislation Becomes Relevant
This is where we need to distinguish between the warning signs and the law.
Section 588GA refers to a person who, after starting to suspect that the company may become or be insolvent, 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.
That statutory language matters.
We should not assume that a late payment, an ATO debt or a difficult month automatically means that a company is insolvent. Equally, directors should not ignore persistent warning signs simply because the business is still trading.
The appropriate response is to establish the facts.
From “Something Isn’t Right” to Knowing Where You Stand
This is where our work begins.
We take the concern — which may initially be unclear — and start replacing uncertainty with information. We ask:
- When did things begin to change?
- What changed?
- What obligations are not being met when they should be?
- What does the current financial information tell us?
Then we examine the business.
We look at cash and banking, debtors, creditors, taxation obligations, employee entitlements, financial records, profitability, finance commitments and the other pressures affecting the company’s ability to meet its debts as they fall due.
The purpose is not to manufacture a Safe Harbour position.
The purpose is to establish the truth.
If there are concerns about actual or potential insolvency, the director should obtain appropriate professional and legal advice about the company’s circumstances and the options available.
Then We Decide What Happens Next
Once the position is clearer, decisions can be made using evidence rather than hope.
Where Safe Harbour is relevant, attention turns to the course of action contemplated by the legislation and whether it is reasonably likely to lead to a better outcome for the company than immediate administration or liquidation.
Our practical work then becomes very important.
- We help establish the financial information.
- We identify what needs attention.
- We help turn decisions into actions.
- We measure the results.
- We document what happened.
- And we continue to review the business as circumstances change.
“Something isn’t right.”
“Here is where the business stands. Here is what needs to happen next. And here is how we will measure whether it is working.”
Why Early Recognition Matters
Recognising financial pressure early does not establish Safe Harbour.
But it does give the director an opportunity to investigate the position, obtain appropriate advice and consider the available options before circumstances deteriorate further.
ASIC encourages directors who suspect financial difficulty to obtain professional accounting and/or legal advice as early as possible.
That makes commercial sense as well.
Earlier action may provide more time to understand the problem, correct poor financial practices, improve information, address compliance issues and determine whether the underlying business can be strengthened.
The purpose is not to panic at the first sign of pressure.
It is to pay attention.
Because financial pressure is information.
And once the director is prepared to confront that information, we can start replacing uncertainty with truth, decisions and measurable action.
Recognise the warning signs. Establish the facts. Obtain appropriate advice. Then decide what needs to happen next.
Talk to us
You don’t need to diagnose the problem before speaking to us. Tell us what is happening, tell us what is worrying you, and show us the numbers. We will start by helping you understand what questions need to be answered.