Safe Harbour for Companies in the Twilight Zone
28 June 2016
The Twilight Zone
If a company reaches the ‘twilight zone’, it’s no secret that the Company Director is going to be under an extreme amount of pressure. Many will have sleepless nights as they struggle to save their company, often going to great lengths and experiencing extreme amounts of stress as a result.
The Government’s Innovation Agenda has proposed changes to company law in an effort to encourage directors to seek specialist assistance, allowing them to make an informed decision as to whether their company can be saved, or whether it should be placed in voluntary administration.
Specialist advisers are not accountants or liquidators
Bringing a wealth of experience to companies in crisis, a specialist adviser helps directors look for ways to turnaround or restructure their business. They focus on the key (and often urgent) issues and offer an independent and objective view of the company’s current situation. A specialist adviser gives a fresh perspective and can help the director explore options analytically that may not have been considered.
A safe harbour defence can help directors
If a company director has used the services of a specialist adviser to develop and implement a reasonable plan, the ‘safe harbour defence’ is designed to protect directors from breaches of the insolvent trading or directors’ duties provisions of the Corporations Act. This defence is governed by multiple safe harbour rules that must be followed by company directors.
A typical safe harbour plan can last up to 2 years and generally consists of:
• A quick analysis to establish scope (c. 1 week)
• A stabilisation phase where cash flow is stabilised and a turnaround plan is developed (30-90 days)
• The implementation phase, which may also involve restructuring the balance sheet or raising capital (up to 18 months)
A plan should be clearly laid out and include both reasonable assumptions and regular reviews. If the plan is unsuccessful and a liquidator or a voluntary administrator is appointed, they should be able to clearly see if the plan was followed and whether it contained reasonable expectations.
As an example, if the plan relied on an assumption that iron ore prices would immediately hit $200 and stay there for the duration of the plan, then the plan wasn’t reasonable, and the directors will be less able to rely on the safe harbour defence.
The key feature of all successful turnarounds is that somewhere in the chaos, is a viable business.
Vantage Performance supports structural changes to the Corporations Act that provide more options to company directors that find themselves in the twilight zone.
It is important to note that these changes to the Corporations Act have NOT been introduced yet. They do not currently provide the protection outlined above. However, prudent directors should seek specialist assistance at the first sign of trouble, rather than waiting until it’s too late.
For an update have a read of our latest post on Safe Harbour here.