Safe Harbour – Vantage’s View
16 May 2017
“I’m not afraid of storms, for I’m learning how to sail my ship.” (Louisa May Alcott)
(Extract from April eNewsletter)
As discussed previously – Safe Harbour for Companies in the Twilight Zone – this legislation aims to encourage directors to seek independent expert help early by offering them the incentive of additional protection from insolvent trading. Whilst the benefits of a safe harbour have long been recognised, it was unclear how this objective would be achieved.
If the Bill receives Royal Assent it could be law by 1 January 2018. The safe harbour would be effected by introducing section 588GA to the Corporations Act, which would afford a safe harbour to directors taking a course of action reasonably likely to lead to a better outcome for the company and its creditors. Directors would need to obtain independent advice from someone who is qualified to provide advice. The question for many people in the turnaround sector is: “who is qualified, how do you become qualified to provide this advice, what safe harbour rules must you abide by?”
I expect that people who are already recognised as having significant business turnaround expertise and experience will become qualified, or meet the test required for safe harbour provision.
The explanatory notes indicate that a director will be required to provide evidence about the course of action that was taken. A liquidator (or other person) seeking to make the director personally liable for any debts incurred while the company was insolvent will bear the onus of establishing that the course of action by the director was not reasonable in the circumstances.
Whether the course of action is reasonably likely to lead to a better outcome will be assessed on an objective basis. Regarding the time at which a director can be considered to have started to take the course of action, the safe harbour will extend to cover a period in which deliberations and preparations for the course of action are occurring.
A feature of safe harbour is that it recognises that even in circumstances where a company’s solvency is doubtful, incurring debts may be part of a reasonable course of action, and that it remains in the interests of the company and its creditors that some loss-making trade should be accepted in trying to secure future viability – for example incurring debts associated with the sale of assets which would help the business’s overall financial position.
The release of this exposure draft and the proposed new legislation are positive steps in assisting directors to take action to improve the rate of business success, and reduce the financial and social impact of failure.