The New Safe Harbour Laws
This week a significant step was made by Australian legislators, introducing a Safe Harbour provision for directors of companies that could be trading insolvent. The Treasury Laws Amendment (2017 Enterprise Incentives No 2) Bill 2017 enables directors to pursue reforms in their business rather than moving the company into administration. In this podcast, Phil Dobbie discusses the legislation with Michael Fingland, Executive Director of business turnaround specialists Vantage Performance. They discuss how this new law will work in practice.
Phil: Hello, I’m Phil Dobbie and today on the Vantage Performance Podcast, The Safe Harbour Legislation. We’ve talked about it in the past, but that’s when it was just in the pipeline. Now it’s passed through parliament. It’s been given royal assent, and that means it’s L-A-W, law.
So this is the new way of doing business, but what does it mean in practice? To dig a bit deeper, Michael Fingland is with me, the executive director of Vantage Performance. I mean, first, let’s look at the objective once again. It was the idea behind this legislation, which reduced the number of companies that go into administration provided there’s a chance that they can be rescued. That’s basically the idea behind it, isn’t it?
Michael: Yeah, it’s long been sort of commented on that Australia has the harshest insolvent trading laws in the world, and it has also been the main reason why we have such a low success rate when it comes to insolvencies or turnarounds compared to other jurisdictions. So this is long-awaited. It’s a real game-changer as we’ve said before because it is going to stimulate directors to get help a lot earlier. Finance is gonna be pressing clients to get help a lot earlier. Everyone is incentivized to ensure that the client survives, restructures gets back on track, and, you know, less disruption to the economy.
Q: So in the practicality of it, I mean, the first point is how do you know if you’re at the point of trading insolvent? Presumably, it’s a warning that’s probably gonna come from your accountant first of all, isn’t it?
A: It should, but a lot of companies aren’t that close to their accountant or their accountant isn’t doing the sort of work that is really required. Usually cash flow is tight. That’s the first sign. Cash flow will be tight. An amount of declining revenue, but it’s really when earnings start to decline or go negative, you’ve got declining cash flow, cash flow is getting tight, creditors are starting to speak up more loudly.
A switched-on director or a director who’s aware of what’s going on in their business, in large or small, will know when those trigger signs are there. They just need to be incentivized to actually do something about it.
Q: Right. I guess it’s straight-forward. If you’ve got a cash flow forecast, you know how much money is coming in, you know how much is gonna go out, and if the figures don’t add up, then you know you got a problem.
A: And look, I wish it was that simple but it’s amazing how many large companies and listed companies that we worked with, down to the SME sector, that don’t have cash flow forecast in place. It’s quite scary. If the average investor knew the lack of internal systems and controls at the big end of town, they would be horrified. But, yeah, if you have that in place, great, but the fact that they don’t, We’ll always be in business.
But you don’t need a cash flow forecast to tell you that things aren’t going so well. You can just walk around the business and understand if cash flow is tight because you’ve got people coming up a floor saying, “Look, I can’t buy this. I can’t buy that.” It’s not too hard. You just need to be willing to acknowledge it and not put your head in the sand, but that’s usually the first trigger, cash flow is tight. No matter what business you’re in, that’s always a trigger that you need to look at that carefully. A qualified turn-around restructuring practitioner will know how to do that very, very quickly to identify are you already insolvent or are you getting close. And that’s the first step is to identify that issue.
Q: Once you’ve identified that, is the safe harbour provision automatically available to you, and if not, how do you determine whether you are eligible or not?
A: Even though that’s the government’s stopped short on actually defining to the nth degree what a qualified restructuring advisor is, in short it’s a turnaround or restructuring advisor. Because they the only ones with the serious skills to be able to give a board comfort and the financiers as well, and the shareholders to that extent, comfort that they’ve done all the right things to actually qualify for safe harbour.
In a previous podcast we talked about all the necessary steps, but quick recap: you need to have identified it. You need to have engaged a qualified advisor to assist you. You need to have made sure your superannuation employee entitlements are up to date and that you’re lodging your tax returns on time, your (BAS) returns. You don’t necessarily have to have paid your (BAS) on time to initially go into Safe Harbour, but you need to make sure your lodgments are on time.
The key definers elements here is, and this is why they’ve structured this way and they’re gonna sort of tidy it up as we go, is as long as you have engaged a qualified restructuring advisor, turnaround advisor, you’ve developed a plan, or you are starting to develop a plan. There doesn’t need to be any guarantee but as long as you think that this plan is likely to result in a better outcome than immediately going into voluntary administration or liquidation. So as long as you’re taking those steps and you can make those determinations, then you are protected from insolvent trading.
Q: It sounds a little vague, doesn’t it? You’re saying, “Well, you know, so long as you’ve got somebody, and we’re not gonna stipulate precisely who or, you know, or we’re not gonna have a register, any company that professes to be able to help you out with some sort of plan…” I mean there’s no stipulation as to what that plan should look like, for example.
A: The reason they’ve done is, they said, “We’re gonna put it into place now, and then we will make improvements to the regulations as we go.”
Even though they’ve kept the definition of a qualified turnaround advisor vague, in practice, you know, as a board, if you just go to your local suburban tax accountant who does tax returns and think that that’s gonna cut the mustard, a liquid is gonna look at that and go, “This guy or girl does not have the advice. You don’t meet with the bar. They’re not a qualified restructuring turnaround advisor on any definition. Therefore, you failed the test and now I can sue you for insolvent trading.”
It will get defined more clearly as we go but in practice, you run a huge risk if you don’t engage a firm, an individual, who has done this for some time.
Q: The other side of it, I mean, once you’ve got that plan, you need to convince all of your stakeholders that that plan is workable and you’re gonna deliver on it. So I guess there’s, you know, it’s not an internal document. So you’ve got that response from your stakeholders and that’s gonna stand you in good stead so long as they agree with the approach that you’re proposing.
A: Well, Turnaround 101 still stands in that if you’re going through this situation, then you’re either being shadowed by the workout division of the bank or you’re already in workout. Nine times out of ten, to get your financiers to agree to your plan, there needs to be an infusion of trust from the outside and that comes by the way of a trusted turnaround advisor who has worked and has delivered many turnarounds before and the banks trust them.
So that needs to happen anyway because you need to regain the trust of your stakeholders. And that’s why a lot of internally-led turnarounds don’t get to that point because they get to a point where they then say, “You need someone else to come in and help.” Bboth tracks require a qualified turnaround advisor to actually steer and guide them through the process.
Q: Right. And your bank is gonna look for that. So if you’ve got your bank on side, then presumably it’s fairly safe to say, “Well, okay, the safe harbour provision must be covering me now because I’ve appointed somebody, the bank is happy, we’ve put a plan forward. Presumably, that safer harbour provision is now covering me. I’m in the clear. I’ve just gotta do the hard work, but in terms of my liability, that doesn’t apply anymore.” Right?
A: That’s right. But the key thing here is, and there’s no definition as to whether you need to test it weekly, or monthly, or six-monthly, but we’re certainly recommending at least monthly, you need to sit down as a director group, board, whatever your structure is and ask that question again: “Do we think that the plan we’ve got in place, the traction we’re getting, is likely to result in a better outcome than liquidation or VA straight away? ”
So you’ve gotta test that regularly to ensure that you stay within the protection of Safe Harbour, and as I said at the outset, you gotta make sure that your (BAS) returns are still being launched on time, and that all your employee entitlements are up to date.
Q: How long for? Is there a time limit on this?
A: Yeah, that’s the thing. It could go for years. I mean, a lot of really complex restructures, you know, large corporate restructures, can take several years to work through. So there is no end date. You can theoretically stay in safe harbour for a number of years, as long as you keep meeting those tests and as long as you keep moving forward.
Your plan can change along the way, as long as the plan you’ve got still meets that test that it’s likely to result in a better outcome. So there is no deadline. The whole thrust of this, is to make sure boards are getting proper advice, not your local tax accountant, not doing it yourself because you just don’t have the expertise and it’s a highly specialized area and, you know, long-awaited.
Q: This has been a long time coming. But, I mean, obviously, it is a very good step forward for Australia.
A: Yeah, exactly right, and it will lead to more jobs being saved. It will lead to less disruption in the economy because we’ve done our own research. There’s up to $13 billion improvements in the economy if you can make just a one-third change in the number of insolvencies. So it’s huge. It’s a huge, huge opportunity now at our feet and everyone’s getting behind it.