Insights

The Importance of Safe Harbour ahead of December 2020


Macaire Bromley

Executive Director NSW

The moratorium on insolvent trading now concludes on 31 December 2020 (extended from 25 September 2020). Given that a number of companies may need 2 to 3 months to become Safe Harbour compliant, it’s critical to start the process well ahead of time. There are some common misconceptions about Safe Harbour and how it operates, which are hindering its use. In this article, we want to resolve those misconceptions and explain why now, is the right time to put in place your Safe Harbour framework.

Common misconceptions about Safe Harbour

Two common misconceptions about Safe Harbour and how it operates are:
1. Safe Harbour is a not a noun – Safe Harbour is a series of actions.
2. A decision to follow the Safe Harbour framework is not an admission of insolvency. The company does not have to be insolvent for you to benefit from the Safe Harbour framework.

We expand on each point below.

Safe Harbour is a series of actions, not a thing

Safe Harbour is a series of actions that you take, that forms a pool of evidence for a judge to consider, in determining whether or not an insolvent trading action can be brought against you.

Although not a defence (strictly, it operates as a carve out), it is akin to a defence. For example, to avoid breaching your director duty to act with care and diligence, you do not ‘enter into’ the business judgment rule. Rather, you point the court to evidence that shows that you acted in a particular manner and took certain steps, to prove for example, that you informed yourself and rationally believed that the judgment was in the best interests of the company.

Safe Harbour is no different. It speaks to your conduct and what is it that you are doing, for example, to restructure the company in times of financial difficulty?

As such, you want to be sure that you are acting in a manner consistent with the Safe Harbour framework criteria, so that at any given point in time that you might need it, you have it.

Safe Harbour is a turnaround framework, not an insolvency trigger

The Safe Harbour framework is geared towards encouraging directors to take steps to achieve a better outcome than liquidation – by definition, it’s a framework focused on turning a company around. It is a pivot away from liquidation and towards viability; a pivot away from inaction or chaotic action, towards clear action with evident benefit and purpose.

So why the opening reference to insolvency?

Safe Harbour operates as a carve out to insolvent trading – technically therefore, as a legal matter, in the absence of insolvent circumstances, the section has no work to do. If a Company is not insolvent, a liquidator cannot succeed in a claim for insolvent trading and the carve out is wholly, unnecessary.

It is not however, a requirement for a company to be insolvent or even for a director to suspect insolvency, for the company and its directors to elect to benefit from the Safe Harbour framework. Likewise, it is not necessary for a company to be distracted by the question of insolvency*, in determining whether it has access to the framework, and indeed that is a highly undesirable effect.

The intention of the section, is to provide directors with an early intervention framework that they can use as a turnaround tool. The benefit is that if they do so, and the company becomes insolvent, that insolvency is not the focus nor does it determine the company’s future – rather, the focus is the turnaround plan and whether that achieves a better outcome than liquidation.

* This is not to say there will not be other reasons for a company to directly address the question of insolvency, for example disclosure or breach concerns.

So what does the prudent director do?

The prudent director will want to secure all available benefits from this framework.

Given that it involves a series of actions, directors will want to know now, what those actions are and what they need to be doing to be take them, so there is no doubt come 31 December 2020, that the framework is in place.

For most companies, there will be concerns around future financial security for the best part of this year, possibly longer. What is the impact on the business if someone in the workplace has COVID-19 and it needs to be shut down for a few days, or what if there is an outbreak amongst staff that impacts the business for a longer period? What if there is a change in government regulation in light of renewed concerns around health? What if the recovery is more prolonged than the cash flow says is needed, and what is the impact of a recession?

Because we can’t predict how this is all going to pan out, you need to be taking all prudent steps now to mitigate risk.

The Safe Harbour framework, is the very framework that does that.

Yes, it’s crafted to mitigate personal risk in respect of insolvent trading; but equally, it’s crafted to mitigate company risk – specifically, the risk of company failure.

How does the Safe Harbour framework mitigate against the risk of a company failing?

– It sets out the fundamental steps of turnaround – it should be viewed by the board as ‘best practice’.

– It gives direction to the board on what you need to be thinking about, in difficult or unchartered circumstances.

– It focuses the minds of management on the need for strong financials – if you are not across the numbers, then you will lack visibility on your genuine runway and the prospects of succeeding in your plans.

– It requires you to have a restructuring plan and it requires you to test that against the worst case outcome – that is, the plan forces you to consider finding a way through.

– And if you can’t find a way through, then the framework guides you – having made all reasonable attempts to save the company, you are now armed with information that allows you to make the tough decisions. A decision around a business that can no longer viably trade, is normally fraught, and an incredibly tough one for a board who feels great loyalty to employees and shareholders. The Safe Harbour framework crystallises the situation and makes it a factual decision, providing an answer to the question, do we keep trading or not?

Next steps?

Irrespective of what you might or might not suspect and since when (all of which is interesting, but fundamentally not going to fix your business), what you need right now, is a turnaround framework that meets the Safe Harbour criteria and someone to help you with that.

The sooner you get this framework in place, the better. Transitioning your company through survival mode, into recovery mode and then looking to normalise trade is a process. The Safe Harbour framework will guide you through that process, and then come 31 December 2020 when the COVID-19 insolvent trading relief comes to an end, you will be Safe Harbour ready, focused on your turnaround and not the question of insolvency.

If you would like further information about the COVID-19 insolvent trading and statutory demand relief, Safe Harbour, working through complex business challenges or improving business performance, please contact us.

This article is general in nature and is not to be taken as financial, legal or governance advice. You should consider seeking independent financial, legal or other advice to check how the information relates to your unique circumstances. Vantage Performance is not liable for any loss caused, whether due to negligence or otherwise arising from the use of, or reliance on, the information provided directly or indirectly.

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