Insights

The Vantage View, Government’s Review of the Insolvent Trading Safe Harbour 


Macaire Bromley VP

Macaire Bromley

Executive Director NSW

On 24 March 2022, Federal Government released the long-awaited outcome of its review of the effectiveness of the Insolvent Trading Safe Harbour. Key recommendations which government agrees to adopt, evidence a willingness to respond commercially and practically to support the ongoing use of Safe Harbour. The changes proposed are to the benefit of businesses seeking to arrest financial decline and improve the position for the company and its stakeholders. 

Vantage is pleased to have been an instrumental part of this process and the express proponent of a number of the recommendations made. Vantage is one of the most active Safe Harbour experts in Australia. 

The key changes include: 

  • It is proposed that the trigger to encourage directors to use the framework will be expanded to include a director who suspects financial distress (in addition to a director who suspects insolvency). This addresses the concern about inadvertently making admissions in relation to insolvency, or being caught up in the complexities of the definition of solvency, when accessing the framework.  
  • Safe Harbour currently encourages directors to engage “an appropriately qualified entity”. To provide greater clarity, it is proposed to amend the text to read “one or more appropriately qualified advisers”. In its response, government observed that the key consideration here is the receipt of appropriate advice. 
  • Additionally, often, it is the company who is the recipient of the appropriate advice particularly in relation to the proposed courses of action, rather than the directors. The text will be amended in recognition of this practical reality. 
  • The employee/tax mandatory compliance element of the Safe Harbour is to be significantly improved, to provide for substantial compliance and remove the much misunderstood two-strikes rule. This change is intended to better reflect the intention of the legislature as expressed in the Explanatory Memorandum, that technical and trivial matters are to be excluded.[i] The new text will align with pre-existing like provisions in the Corporations Act, as set out later in this article. 

This change is a welcome recommendation, arising in particular from a detailed Vantage Submission on point[ii], based on our practical experience.  

  • Government agrees to the release of a plain English, best practice Safe Harbour guide by ASIC. This guide will include, amongst other things, guidance on tax reporting obligations noting currently, there is no readily available list of finite tax reporting obligations to assist directors in meeting their mandatory tax compliance obligations. It will also include guidance on what is meant by substantial compliance.  
  • A number of additional technical changes are proposed. The most relevant of these for directors, relates to a director’s obligation to produce documents under an insolvency framework. It is proposed to amend the law to expressly include documents that relate to the company, even if they are not books and records of the company. If the director fails to produce such documents, he or she will not be entitled to rely on those documents to establish Safe Harbour in any court proceedings.  

Implications for directors of the proposed changes 

Although welcome, it is currently unclear when the changes will be enacted as law, particularly in light of the upcoming federal election. As such, directors will need to know, what are the immediate implications of the Review of the Insolvent Trading Safe Harbour Report, November 2021 (Report) issued by a Panel appointed by Treasury (Panel) and Government’s Response to the Review of the Insolvent Trading Safe Harbour, March 2022 (Gov Response)? 

In short, there was consensus amongst those who actively operate, and have day to day experience of the Safe Harbour, that it is effective and fit for purpose in supporting company turnarounds, in promoting good corporate governance and saving companies and jobs.[iii] Directors should: 

  • continue to access the Safe Harbour early and when first concerned about the financial position of their companies – this will ensure the best prospect of avoiding company failure;  
  • actively seek out expert advice, to ensure proposed turnaround initiatives are founded on accurate and reasonable information, that directors can comfortably rely upon. It is our clear experience that companies that attempt to go it alone, are more likely to fail than those that ask for help;[iv]  
  • continue to remain vigilant about tax and employee compliance, in line with the current law. Directors may take comfort however, that for periods of insubstantial non-compliances, when in all other respects the Safe Harbour framework is being met, a court may more likely be persuaded by the findings of the Report and Gov Response, to exercise its discretion to disregard such non-compliances. 

Further detail is provided below. 

Safe Harbour is a turnaround framework, not an insolvency trigger  

Practically, it is not a requirement for a company to be insolvent for the company and its directors to elect to benefit from the Safe Harbour framework. The framework is a best governance tool that a board should put in place as soon as they have solvency concerns. The new proposed language will be helpful to clarify this when enacted – and in the meantime, if a director has concerns about possible financial distress, they should seek Safe Harbour advice.  

Read our article for more information on the Safe Harbour as a turnaround framework, not an insolvency trigger. 

Receipt of appropriate advice 

One of the elements that the court will consider on whether the steps taken by the company to improve its financial position were reasonable, is whether an appropriately qualified entity was engaged. The government confirms[v] that the key criteria for directors to concern themselves with, is that appropriate advice is obtained. That is, to not engage an appropriate adviser, poses a risk for directors.  

In terms of who that adviser should be, the Panel confirms, that will depend on the nature of the work to be undertaken, and may include a number of advisers.  

Specifically, the Panel said “we find the argument for flexibility compelling and are reluctant to endorse a view that requires a specific person to be appointed in all circumstances”[vi]. The Panel noted however, that in relation to the better outcome assessment, a person who has the requisite expertise including to prepare a security statement ought properly be involved. This will include a registered liquidator with turnaround experience or a turnaround specialist with deep insolvency experience[vii], such as Vantage.  

Vantage routinely assists clients as a Safe Harbour specialist including to assist specifically with the preparation of the requisite documents to assess the better outcome. Vantage’s approach in this regard was expressly endorsed by the Panel, “noting Vantage’s submission, based on its industry experience, that the better outcome analysis is utilised most effectively when it leverages both quantitative and qualitative data”[viii]. For further information on how the better outcome test is assessed, see Vantage’s Submission at pg 15-17. 

Company as the recipient of turnaround advice 

The Report notes the practical realities on who is likely to be receiving the advice on the courses of action developed and taken – namely, the company not the director[ix]. Given the potential implications in the context of privilege and D&O coverage, the Panel is concerned to ensure the law is extended to expressly include advice whether provided to the directors or the company.  

Although helpful, we note that in reality, with or without this change, all or practically all of the underlying work required to provide Safe Harbour advice, will involve the company. Very limited advice can be provided exclusively to the directors, without involving the company. If the company’s position is to improve, it is the company’s position that needs to be reviewed, initiatives need to be workshopped with company’s senior management to test viability, and implementation occurs with the company. Additionally, employee and tax compliance needs to be interrogated with finance and human resources teams, including to provide recommendations on process improvements in the case of historic non-compliance. Given the need for the company’s involvement, the ability to meaningfully protect privilege is nuanced – if it is something the directors are seeking in a particular case, it needs to be carefully managed.  

At the end of the day, where certain advice is given to the company, in practice the directors are privy to that as members of the board and rely upon it accordingly. Where advice is given solely to directors, that tends to be a summary of work undertaken with the company together with conclusions. Directors should review their D&O policies in light of these practical realities, to consider any issues to be addressed when engaging advisers. 

Tax and employee mandatory compliance 

Unless and until the proposed changes are made to the tax/employee mandatory compliance section, directors need to continue to comply with the current section, which includes the two strikes rule.  

Nonetheless, the proposed changes are helpful in this respect: 

  • If a company has substantially complied with its tax and employee obligations, and the only outstanding compliance issues are technical or trivial in nature, a director may have greater confidence – relying on the Report and Gov Response – that a court would enliven its discretion under subsection 588GA(6) to disregard such non-compliances for the purposes of Safe Harbour. 
  • Of course, this will depend on the particular circumstances, to be reviewed with an adviser with relevant experience. 

Based on the Gov Response, the proposed text of the new law will read as follows: 

 “(4) Subsection (1) does not apply in relation to a person and either a debt or a disposition if: 

(a) the company has: 

(i) paid the entitlements of its employees that are payable; 

(ii) given returns, notices, statements, applications or other documents as required by taxation laws (within the meaning of the Income Tax Assessment Act 1997 ); and 

(b) that failure: 

(i) amounts to less than substantial compliance with the matter concerned;  

At page 65 of the Report, the Panel notes “In our view, simplifying the wording of the legislation would make it easier and less costly for directors to determine if they are complying with the pre-conditions. Directors’ focus should be on the better outcome analysis rather than detailed analysis of technical compliance with the pre-conditions.  

… The Panel’s view is that substantial compliance should be assessed broadly with regard to all employee entitlements or tax lodgments (as relevant), and not pick up technical, trivial or minor matters.”  

This is helpful guidance and reflects the legislature’s original intent as follows: 

The Explanatory Memorandum confirms: 

a director will not be eligible for the Safe Harbour protection if the company is either serially failing to meet its obligations, or there has been a serious failure by the company to substantially meet its obligations to pay employee entitlements or meet tax reporting obligations.[x]  

Vantage will release a separate article to discuss mandatory compliance (including the operation of the two strikes rule) in greater detail, based on our experience and submission. 

Books and records relating to the company 

The Panel’s observation that Safe Harbour advice may be provided to a director or to the company, or both, has ramifications for the production of documents in any formal insolvency administration.  

To accommodate this reality, it is proposed to amend the law to expressly include documents that relate to the company, even if they are not books and records of the company. If a director fails to produce such documents, he or she will not be entitled to rely on those documents to establish Safe Harbour in any court proceedings. 

A director should seek legal advice in the event a company proceeds into a formal insolvency appointment, and he or she is required to produce documents, on what documents need to be produced. Relevantly, we note advice given to the director personally may be beneficial. If that is the case, it would be beneficial to produce that document early, to support an argument that court proceedings should not be commenced at all, or failing that, to ensure the director can rely upon that document in any proceedings. 

ASIC Safe Harbour Best Practice Guide 

General consensus was observed by the Panel, of which Vantage was a key advocate,[xi] that increased awareness and education are an important next step to support director awareness and understanding of Safe Harbour protection. This expressly includes a recommendation that ASIC update its insolvent trading guidance and create a best practice Safe Harbour guide. 

The Panel recommends the following in relation to such a guide[xii]: 

  • that it be plain English 
  • that it be general in nature and not too prescriptive 
  • that it be prepared in consultation with key industry groups 

Topics to be addressed in the guide will expressly include: 

  • specific guidance on a company’s taxation obligations and what is meant by substantial compliance 

 Background: the Panel recommended express changes to the mandatory compliance element of Safe Harbour, to include a finite list of taxation obligations, and to define ‘substantial compliance’. The Government stopped short of agreeing to these recommendations. Instead, Government proposes that these matters be addressed in the guide. 

  • general criteria on the requirements of an appropriately qualified adviser 

The Panel notes that the general criteria could draw on the pre-existing guidance in the Explanatory Memorandum[xiii]. Vantage’s submission addressed this topic in detail and relevantly, Vantage noted [1.69] of the Explanatory Memorandum which provides: 

“Appropriately qualified” in this context is used in the sense of “fit for purpose” and is not limited merely to the possession of particular qualifications. It is for the person who appoints the adviser to determine whether the adviser is appropriate in the context, having regard to issues such as: 

  • the nature, size, complexity and financial position of the business to be restructured; 
  • the adviser’s independence, professional qualifications, good standing and membership of appropriate professional bodies (or in the case of an advising entity, those of its people); 
  • the adviser’s experience; and 
  • whether the adviser has adequate levels of professional indemnity insurance to cover the advice being given. 

The particular qualifications needed by the adviser will vary on a case-by-case basis.” 

Next steps? 

The Safe Harbour remains a relevant and effective best governance tool. In the current economic environment, it is becoming increasingly important for directors to seek Safe Harbour advice early. 

According to the Report, Vantage Performance is one of the most active Safe Harbour experts in Australia, having conducted 23 Safe Harbour engagements as at Sept 2021 (now approaching 30), second only to Deloitte.[xiv] Vantage prides itself on being genuinely concerned about saving companies and jobs, evidenced by our 85% track record of success. 

If you would like further information about Safe Harbourarresting cash burn, sourcing fresh working capital, restructuring or refinancing debt, working through complex business challenges, and improving business performance to secure long term viability, please contact us. 

Author: Macaire Bromley   

*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. 

[i]  Explanatory Memorandum, Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017 (EM), [1.79]. 

[ii] Vantage Submission, pg 3, 17-25, 36-38. 

[iii] Vantage Submission, pg 3; for successful case examples across firms nationally, see the submission of the Turnaround Management Association of Australia (TMA, Australia) (of which Vantage is a member firm). 

[iv] Vantage Submission, pg 8 

[v] Gov Response, pg 4 

[vi] Panel Report, pg 54 

[vii] Panel Report, pe 53-55 

[viii] Panel Report, pg 46 

[ix] Panel Report, pg 59 

[x] Discussed further and cited as part of the Vantage Submission, pg 36-37 

[xi] Vantage Submission, pg 4 

[xii] Panel Report, para 6.2 

[xiii] Panel Report, pg 57 and EM [1.69] and [1.74]; see also Vantage’s Submission, pg 40-43 for a summary of the EM and relevant commentary 

[xiv] Panel Report, pg 28 

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