If it’s a short-term cash flow problem, you can start looking at alternative sources of funding. If it’s a deeper underlying issue, it’s time to refer them to a turnaround and insolvency expert who can further assess the situation and advise on the best course of action.
If saving the business is possible, your client can take advantage of Safe Harbour. Here we outline what this involves and when and how it can help them.
To learn more about the Safe Harbour legislation, or to discuss our business turnaround and advisory services, get in touch.
Note: The Australian Government passed legislation relieving liability from insolvent trading between 25 March 2020 and 31 December 2020 in circumstances where a debt is incurred in the ordinary course of a company’s business (meaning that incurring the debt must be necessary to facilitate the continuation of the business) (Section 588GAA(1)) (COVID-19 safe harbour provisions). This relief has now ceased and the content below explains the current arrangement for safe harbour.
Removing civil liability
In the past, companies facing insolvency often opted to put themselves into voluntary administration or liquidation. If they didn’t, directors risked facing civil penalties for insolvent trading, as well as compensation and criminal charges under the Corporations Act 2001.
Today, thanks to the introduction of the Safe Harbour bill in September last 2017 – section 588GA of the Act – liquidators are prevented from taking civil action against directors for as long as they are taking reasonable actions to turn things around.
Importantly, claims for personal guarantee debts, breaches of directors’ duties or criminal liability for insolvent trading can still be brought against them.
Entering safe harbour
If turnaround for your client is possible, recommending they take advantage of the safe harbour is good advice. By doing so, they give themselves the space to take positive actions to improve their financial status, without fear of being personally pursued.
In order to benefit from the safe harbour, your client should take the following steps to ensure they are protected and to help their business return to profitability:
- Get their accounts and records in order: This includes understanding where their debts are and how much debt they owe, as well as fulfilling legal obligations including being up to date on your tax reporting and having employee entitlements, including super, fully paid.
- Seek expert advice: It’s recommended they appoint an appropriately qualified (ARITA) turnaround and insolvency expert to ensure they aren’t denied safe harbour protection.
- Gauge financial feasibility: This means carefully assessing whether the options available to them for turnaround are ‘reasonably likely to lead to a better outcome for the company’ than voluntary administration or liquidation.
- Develop a turnaround plan: This must be properly documented, though it needn’t be complex. This plan should not only serve as a useful checklist, but it can also show a future liquidator that sound intent was there if things do go south.
It’s crucial to make your client aware that the safe harbour only extends to debts incurred directly or indirectly to this plan, or its development.
While there is no set duration for how long a company can stay in the safe harbour, you should advise your client they will lose protection if:
- They fail to implement the course of action developed in order to enter safe harbour
- They cease implementing the specified course of action
- The course of action ceases to lead to a better outcome
- They fail to pay employee entitlements (eg. super) or fulfil their tax obligations (eg. lodge their tax returns and BAS).
Leaving safe harbour
Best case scenario, safe harbour will end as a result of your client’s business regaining solvency.
Worst case, the company hits insolvency despite all efforts being made to turn things around. If this happens, a formal insolvency appointment – either voluntary administration or liquidation – is likely to be unavoidable.
At this point, your client’s turnaround expert cannot be engaged to help with the insolvency appointment. Instead, an independent registered liquidator must be brought in.
Safe to fail or succeed
Safe harbour is not a ‘fail safe’ for businesses to avoid insolvency. However, it provides them protection from civil liability while they work with their accountant and turnaround expert to turn the business around. It lets them take the kind of restructuring risks that will hopefully get them back on track.