What the Law Actually Requires

Safe Harbour is not an automatic status that applies whenever a company experiences financial difficulty.

Section 588GA operates in particular circumstances and is subject to important requirements and limitations. Whether it applies to a director, company or particular debt depends on the facts and the legislation.

The Starting Point

Section 588GA begins with an important point in time.

After a person starts to suspect that the company may become or be insolvent, the person must start developing one or more courses of action that are reasonably likely to lead to a better outcome for the company.

Financial warning signs may contribute to a director developing that suspicion. These might include continuing cash shortages, increasing taxation debt, creditors being paid outside agreed terms, difficulty meeting employee entitlements or an increasing reliance on payment arrangements or short-term finance.

The Course of Action

The central concept in section 588GA is the development and taking of one or more courses of action reasonably likely to lead to a better outcome for the company.

The legislation also identifies matters that may be considered when assessing whether a course of action is reasonably likely to produce that better outcome.

These include whether the director is properly informing themselves about the company’s financial position, taking appropriate steps to prevent misconduct, ensuring appropriate financial records are maintained, obtaining advice from an appropriately qualified entity supplied with sufficient information, and developing or implementing a plan to restructure the company and improve its financial position.

This is important because it demonstrates that Safe Harbour is concerned with more than an intention to improve the business. It is concerned with information, decisions and action.

What Is a Better Outcome?

The legislation defines a better outcome.

It means an outcome that is better for the company than the immediate appointment of an administrator or liquidator. That is the comparison required by section 588GA.

It does not mean that every turnaround must ultimately succeed, nor should Safe Harbour be described as a guarantee that a company will recover.

The relevant question is whether the course of action is reasonably likely to lead to the statutory better outcome. That assessment needs to be made on the circumstances and information available and should continue to be reviewed as those circumstances change.

The Debts Incurred During the Period

Safe Harbour does not simply attach to every debt incurred by a company experiencing financial difficulty.

Section 588GA contains specific requirements concerning debts incurred during the relevant period. Under the current legislation, this includes a debt incurred directly or indirectly in connection with the relevant course of action, or a debt incurred in the ordinary course of the company’s business, during the period specified by the section.

This is another reason why directors should obtain appropriate advice about their particular circumstances rather than assume that Safe Harbour applies generally to everything the company does.

Employee Entitlements and Taxation Obligations

There are important statutory conditions that can prevent Safe Harbour from being available.

The legislation addresses whether the company is paying employee entitlements that are payable and whether it is giving returns, notices, statements, applications and other documents required by taxation laws.

Employee entitlements for this purpose include superannuation contributions payable by the company.

The provisions contain detailed rules concerning failures and substantial compliance. These requirements should therefore be examined carefully in each case rather than reduced to a simple website checklist.

For us, however, the practical message is straightforward:

How Long Can Safe Harbour Continue?

There is no simple fixed number of days or months that applies to every company.

Section 588GA identifies the period by reference to the course of action.

Broadly, the relevant period begins when, after starting to suspect the company may become or be insolvent, the person starts developing the relevant course or courses of action.

The legislation then identifies circumstances in which that period ends, including where the person does not take the course of action within a reasonable period, stops taking it, the course ceases to be reasonably likely to lead to a better outcome, or an administrator or liquidator is appointed.

This is why continuing review matters. A course of action that was supportable at the beginning should not simply be assumed to remain appropriate indefinitely.

Evidence Matters

A person wishing to rely on section 588GA in relevant proceedings bears an evidential burden. The Act defines that burden in terms of adducing or pointing to evidence that suggests a reasonable possibility that the relevant matter exists or does not exist.

This makes contemporaneous information and records important.

Financial information, advice received, plans, decisions, actions, meeting records, correspondence, compliance records and measurements of the company’s progress may all contribute to establishing what was actually occurring at the relevant time.

That does not mean that producing a particular set of documents automatically establishes Safe Harbour. Nor does documentation replace action.

The purpose of good records is much more fundamental: to create a reliable contemporaneous account of the information available, the course being pursued, what was actually done and what happened as a result.

What This Means in Practice

This is where we make a clear distinction between the legislation and our work.

Our role is to help directors establish reliable financial information, understand what is happening inside the business, develop and implement actions, maintain regular review, measure results and create a contemporaneous record of that work.

We do not determine whether Safe Harbour ultimately applies as a matter of law, and our involvement does not guarantee that a director has or will retain Safe Harbour. Where legal interpretation or advice is required, appropriate legal advice should be obtained.

What we can do is help make the course of action real, measurable and visible.

1. We establish the truth.
2. We agree on what needs to change.
3. We measure whether it changes.
4. We document what happened.
5. And we repeat that process as the business develops.

A Continuing Responsibility

Safe Harbour should not be understood as a date on which something is simply “switched on”.

The financial position of the company can change. The assumptions supporting a course of action can change. The results of the actions taken can change what needs to happen next.

That is why information, review and correction are so important.

The legislation determines the legal position. Our work is about helping the director take informed action, measure the consequences and build the financial discipline required to pursue a better outcome.