Insights

Macaire Bromley

Executive Director NSW

The temporary safe harbour (which ends on 31 December 2020) addresses solely the question of insolvent trading. On the question of saving businesses and jobs, if they have not already done so, directors must turn their focus to the permanent safe harbour found in section 588GA of the Corporations Act.

Earlier this year, we spoke about the importance of the permanent safe harbour (Safe Harbour) and the need in the current climate for a high degree of discipline and visibility over expected cash flows. We encouraged directors to proactively engage with their stakeholders and adhere to a checklist that included the following:

– Do you have good visibility over your cash flow?
– Do you have payment plans for all creditors not paid within terms, agreed in writing?
– Are you meeting all your tax lodgement obligations?
– Are you paying all employee amounts due on time?
– Do you have quality financial records, are you keeping appropriately informed about the financial position and are there processes in place to ensure there is no misconduct that might adversely skew the financial information that you are getting?
– If you are struggling financially, and to execute a turnaround plan to achieve a ‘better outcome’, do you have appropriate expert advisers assisting you to find a way through?

Now, with December only weeks away, we again remind directors:

• If your company is facing financial difficulties, then it is critical that you have regard to the Safe Harbour framework, not only to provide protection from insolvent trading but more fundamentally, to save the business. A key element of the Safe Harbour framework involves you developing and implementing a plan to survive.
• The Safe Harbour framework requires that there be no subsisting employee and tax compliance issues, taking into account other failures in the prior 12 months. Practically, it will take time for you to get comfort that this is the case, so you need to be acting now.
• Under the Corporations Act, a director must act with care and diligence, and exercise good faith in the best interests of the company. Importantly, in the ‘twilight zone’ (as a company nears insolvency) and in insolvency, directors must take into account the interests of creditors under general law. This includes employees, suppliers and financiers. Directors of financially distressed companies cannot discharge their duties by trading the company on, without having regard to the impact of that decision on creditors.
• The best way to ensure that you are meeting this general law obligation, is to adhere to the Safe Harbour framework. It ensures that the board is focused squarely on the question of whether stakeholders taken as a whole, including creditors, are better off by continuing to trade or not.
• The law encourages directors to engage an appropriately qualified advisor to assist them in formulating and implementing the turnaround strategy. Directors should identify an expert with deep experience in turning distressed companies around; someone who can help them stabilise the business, triage the issues and find options that may not otherwise have been considered.

Conclusion

We recommend, irrespective of the temporary safe harbour and noting that it comes to an end soon, that the prudent director continue to meet Safe Harbour requirements and seek expert advice in these very difficult times.

If you would like further information about Safe Harbour, how to instil a strong cash flow culture in your organisation, how to secure the support of your creditors and key stakeholders such as your bank, working through complex business challenges or improving business performance, please contact us (details below).

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.