If your company or a company you advise is unable to pay its debts as and when due there is now a new option. Instead of simply placing the company into Administration or Liquidation, both formal insolvency processes, there are now new “safe harbour laws” which provide another option for Directors, effectively avoiding a formal insolvency process.

This new option means that Directors of a company can put a plan in place to restructure the business and at the same time avoid the possibility of having personal liability for debts incurred when the company was insolvent.

Up until September last year, Corporations Act 2001 laws resulted in the possibility of directors incurring personal liability for debts incurred when a company traded whilst insolvent. Section 588G imposes a duty upon directors to prevent a company from engaging in insolvent trading where:

  • he or she was a director of the company at the time the company incurred the debt;
  • the company was insolvent at that; and
  • there were reasonable grounds for suspecting that the company was insolvent or would become insolvent.

S.588G discouraged directors from allowing companies to incur debts which it would or may be unable to repay, simply because these debts may well have ended up becoming a debt for the director or directors personally. This tended to have the effect of ‘forcing’ the formal insolvency process, most likely Administration in the first instance, despite the fact that the business could still be viable had it been able to ‘trade out’ of its current cash flow problems.

Safe-Harbour-Post

In September last year, new sections 588GA and 588GB were incorporated into the Corporations Act 2001.These “Safe Harbour laws” can mean that a director will not be personally liable for debts incurred by the company while the company was insolvent, where it can be shown that:

  • the director started developing one or more courses of action (“Course of Action”) that were reasonably likely to lead to a “better outcome” for the company; andResearch your business market thoroughly
  • the debts were incurred directly or indirectly in connection with that Course of Action or plan.

A “better outcome” for the company is an outcome that is better than the immediate appointment of an administrator or liquidator of the company and provides a guide on what may be taken into account in determining whether a Course of Action is reasonably likely to lead to a better outcome for a company.

The guide includes:

  • whether a director has properly informed themselves of the company’s financial position;
  • whether a director takes appropriate steps to prevent any misconduct by officers or employees that could adversely affect the company’s ability to pay all of its debts;
  • whether a director takes appropriate steps to ensure that the company is keeping appropriate financial records consistent with the size and nature of the company;
  • whether a director obtains advice from an appropriately qualified entity (e.g. an insolvency practitioner) who was given sufficient information to give such advice; or
  • whether a director develops or implements a plan for restructuring the company to improve its financial position.

It is interesting to note that ‘appropriately qualified entity’ is not defined.

To ensure that “Safe Harbour” is available to you and your company the proposed plan to be implemented will need to take account of the above.

The “Safe Harbour” laws will apply from the date a director or directors start developing a Course of Action until the earlier of the following:

  • if the director fails to implement a Course of Action within a reasonable period; the director ceases to take a Course of Action;
  • the Course of Action ceases to be reasonably likely to lead to a better outcome for the company; or
  • whether a director takes appropriate steps to ensure that the company is keeping appropriate financial records consistent with the size and nature of the company;
  • the company appoints an administrator or liquidator.

If you believe your company may benefit from the “Safe Harbour” provisions, it is probably best to talk to your financial or legal advisor.

If your company is in trouble or you are ready to appoint a liquidator or administrator, you can get in touch with the team at Ticcidew via the website.

Simon Coad,
Turnarounds & Insolvency | Forensic Accounting | Business Revitalisation