we have answers.
As the economy and market continue to throw curveballs, many businesses remain or are being further pushed into financial distress.
Unfortunately, we often see directors either stick their heads in the sand or attempt to stick it out while pouring their own money in as a band-aid fix. But rather than avoiding financial crisis, it can exacerbate the issue.
There are many reasons for this: shame, the fear of a formal insolvency appointment and/or being held responsible for insolvent trading. The good news is there is a way to dissipate the concern and risks – by entering safe harbour.
What is safe harbour?
Introduced in 2017, the safe harbour law reforms provide directors of companies that are insolvent or likely to become insolvent a viable alternative to the appointment of a liquidator or administrator.
Essentially, safe harbour protection is an insurance policy. It gives directors of distressed companies the space they need to turn things around without the worry of being personally pursued for trading while insolvent.
In practice, this means they have necessary additional time to seek professional advice and consider all viable options for getting back on track.
Safe harbour rules
To claim the benefits of safe harbour, a business must be able to prove, after the fact, that they were taking a course of action that was reasonably likely to lead to a ‘better outcome’ than a formal insolvency appointment.
Actions that are likely to lead to a ‘better outcome’ include:
- Developing and implementing a turnaround plan for restructuring the company to improve its financial position
- Being properly informed of the company’s financial position
- Taking appropriate steps to prevent misconduct by managers and staff that could impact the ability of the company to pay its debts
- Taking steps to ensure the company is keeping adequate financial records for its size and type
In addition, the following conditions must be met:
- Debts incurred must be incurred either directly or indirectly in connection with the proposed course of action under the restructuring plan
- All employee entitlements, including superannuation, must be paid as and when they fall due
- All tax reporting requirements must be complied with
Ensuring safe harbour + turnaround success
While the above are crucial for entering safe harbour, there are two factors critical for safe harbour and turnaround success:
Taking swift action
The quicker you take turnaround actions for a ‘better outcome’ and comply with the safe harbour rules, the better protected you are.
That’s why we recommend that the best time to access safe harbour protection is as soon the company suspects it’s approaching insolvency.
Engaging turnaround specialists
While engaging a turnaround and safe harbour specialist may seem like another cost when cash and resources are already scarce, their value makes it a worthy investment.
Specialists can help ensure the actions likely to lead to a ‘better outcome’ are being taken correctly and all conditions are being met. Their independent experience and expertise also ensure the right plan is in place – and executed properly.
Directors should be aware of the risks they face when navigating a turnaround. Some of the risk can be mitigated with Directors & Officers liability insurance policy however the premiums for this type of policy continue to climb and often have ‘insolvency exclusion”. Entering safe harbour can act like an insurance policy against a potential insolvent trading claim.
Director should not wait until it’s too late to engage a specialist, if they do, they potentially lose the opportunity to turn things around and the situation is beyond the point of return.
Sail to success with safe harbour
There are always options, no matter how tidal the financial storm.
Safe harbour provides the moment of calm directors need to create a viable plan for turning their distressed business around. When properly executed with the right specialist support, they can sail away into a more successful financial future.
If you or your client’s small to medium business is facing financial distress, contact our safe harbour and turnaround specialists today to arrange a confidential consultation and start taking the right actions before it’s too late.