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Directors, now’s the time to consider safe harbour.

By Melissa Grundy, Senior Advisor, Effective Governance If ever there were times challenging enough for boards to be considering the financial lifeline that is safe harbour from insolvent trading, these are they. On a daily basis we are reading news of businesses having to shut down and lay off employees and seeing footage of lengthy Centrelink queues. Boards are working harder than ever to govern their organisations in incredibly uncertain times. Particularly in uncertain times, directors become very aware of the personal liability implications for permitting an organisation to trade while insolvent – that they could face personal liability for the company’s insolvent trading and may, as a consequence, be required to pay compensation to the company from their personal assets, which may in turn lead to bankruptcy. However, it seems that many boards are not aware of a key piece of legislation which, when properly advised, may actually lessen their personal liability – s.588GA of the Corporations Act 2001 (Cth) (Corporations Act), known as the safe harbour provisions. What is safe harbour? Boards may qualify for safe harbour protection where they put in place an appropriate strategy for the company which aims to put the company in a better position and allow the company to continue to trade while carrying out that strategy, as opposed to placing a company into external administration. Safe harbour starts when a board starts developing one or more courses of action which are reasonably likely to lead to a ‘better outcome’ for the company than the immediate administration or liquidation. What a ‘better outcome’ is isn’t defined – it just needs to be a better outcome than the immediate appointment of an external administrator. A properly advised board that enacts an appropriate safe harbour strategy will be entitled to rely upon the safe harbour strategy as an ‘exception’ to any claim of insolvent trading, in the event the company falls into liquidation. Background to the introduction of the safe harbour provisions The Corporations Act imposes a duty on directors to prevent a company from incurring a debt (or debts) when the director has reasonable grounds to suspect the company is, or may become, insolvent. Under Australian law, a company is considered to be insolvent when it is unable to pay its debts as and when they fall due and payable. Although there are some defences available to a director, liability for insolvent trading can expose a director to a range of penalties including civil or criminal penalty orders or orders to pay compensation for debts incurred by the company whilst insolvent. Director and officer (D&O) insurance can’t be relied upon to come to rescue in these circumstances, as these policies often exclude claims relating to insolvent trading. The Treasury Laws Amendment (2017 Enterprise Incentives No 2) Bill 2017, which introduced the safe harbour provisions, resulted from concerns by government that directors were not fully engaged in turning around the performance of companies in financial difficulties – choosing voluntary administration instead – because they had potential liability for insolvent trading. In other words, they were putting their own interests ahead of the needs of the needs of the company. You need the ‘right’ advice For a company to enter safe harbour, a board requires a range of specialist advice – an insolvency or corporate lawyer, a turnaround expert experienced in reconstructions and trade-outs, a crisis communications adviser and a specialist governance adviser to ensure that governance processes support the turnaround. Your local lawyer or tax accountant is not the person for this job. These advisers will assist the board to rapidly put in place strategies that are aimed at achieving a ‘better outcome’ and ensure that the company’s systems and processes more accurately monitor the company’s operating position and support the board’s decision making. This is so that the board knows exactly what the company’s financial position is, its board papers and minutes appropriately document its activities, and how and why the desired outcome is still a ‘better outcome’. Not all companies will be eligible to call safe harbour, because in order to enter into a safe harbor strategy, companies must (among other things) be able to pay their employee entitlement obligations in full and on time, pay their tax obligations and have existing and up-to-date D&O insurance. Accordingly, the sooner boards engage with appropriately experienced experts, the greater their ability to access safe harbour. The Government’s additional response to coronavirus The Australian Government is responding to the unprecedented environment we’re now experiencing as a result of the coronavirus pandemic, by offering further assistance to directors and companies in financial difficulties. As part of its second stimulus package, the government announced some temporary changes to the insolvency laws, including a moratorium on directors’ personal liability for insolvent trading which may arise from debts incurred during a 6 month period from 25 March 2020 (to be s.588GAAA of the Corporations Act). While incredibly beneficial, this moratorium is not a ‘get out of jail free card’, in that criminal penalties will still apply to debts incurred dishonestly or fraudulently during this period, and directors risk complacency if they don’t take other action to get the best available advice. Act now and seek appropriate advice So, what to do? Boards should not linger in seeking skilled advice. This could make all the difference for your employees, members and service recipients, not to mention directors’ reputations and the company’s long-term sustainability.

COVID-19 Update

We are in the process of dealing with our response to the current COVID-19 pandemic. Like a number of organisations, Effective Governance has recently made a decision to have some of its staff working from home. Effective Governance staff regularly work remotely in providing governance services to our clients. In managing our response to COVID-19 you can be assured we will be providing our full suite of leading practice services to all of our clients, as normal. Our infrastructure and systems fully support our entire team working in such a way. As you may be aware, a large amount of our board and governance review work is routinely conducted online and for client meetings or group presentations we are now using video conferencing facilities such as Zoom, in addition to teleconferencing.  So, despite a change of location, we are all still fully available and are continuing to work with clients, albeit in slightly different ways. Some of our clients have asked us to help them identify specific governance activities that can be conducted online, and as a result, we have been undertaking more governance documentation reviews, policy and charter development, director skills assessments and board maturity assessments to ensure that their systems, processes and succession planning reflect leading practice. We appreciate the challenging circumstances that our entire nation and world is experiencing and wish to re-affirm our support as you lead your organisations through these unprecedented times. We actively partner with our in-house corporate legal expertise, HopgoodGanim Lawyers, to supply cohesive delivery of corporate legal advice to support your corporate governance framework, which may be particularly beneficial during this period of tumultuous change.

Employee records and privacy: employer ordered to pay $60,000 compensation for breach of employee privacy

By Andrew Tobin and Hayden Delaney

Key issues:

  • An Australian employer was recently ordered, along with other remedial measures, to pay $60,000 compensation (including for ‘aggravated damages’) to 14 employees and former employees for breaching their privacy.
  • The decision of the Office of the Australian Information Commissioner (OAIC) on 28 May 2019 ('QF' & Others and Spotless Group Limited (Privacy) [2019] AICmr 20 (28 May 2019)), highlights the risks for employers associated with improper handling of employee records and provides some useful insights into managing and containing those risks.
  • In short, the employer might have avoided liability; much of the formal dispute resolution process, and; the associated adverse publicity, through:
    • further attention to its privacy policy and processes; and
    • in the terms and conditions of employment offered to the employees concerned.
 

Whistleblower reforms now a reality

By Andrew Tobin, Partner and Michelle Eastwell, Partner Key issues:

  • The new Federal whistleblower regime has taken effect as of today, 1 July 2019.
  • The Treasury Laws Amendment (Enhancing Whistleblower Protections) Act 2019 (Cth) (Act) marks a major change in how Australian businesses are to deal with whistleblowing.
  • It is important that companies, who are yet to do so, get on the front foot to address these changes. A failure to implement proper policies and procedures that are adapted for your business could have serious consequences down the line.
 

When did ASIC become the expert on culture?

It was with great concern that I read the article about ASIC inserting organisational psychologists into the banking boardrooms. I am in support of the value of the organisational psychologists in assisting the Board, our products and systems are built on their expertise. I am just opposed to the regulator using organisational psychologists as a tool that is not reportable to the Board it is observing.  

Conflicts of Interest and Disclosure

The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Banking Royal Commission), as part of its inquiry, sought advice from Professor Sunita Sah from Cornell University, in the form of a research paper, on how conflicts of interest and disclosures of conflicts of interest can influence decision making.  Professor Sah, an acknowledged expert in behavioural ethics and conflict, provided her research paper on 1 November 2018.  

The age of compliance: is your company ready to adopt the new ASX Corporate Governance Principles and Recommendations?

By Michelle Eastwell and Melissa Grundy

Key issues:

  • The ASX Corporate Governance Council released the Fourth Edition of the Corporate Governance Principles and Recommendations on 27 February, 2019.
  • The Principles are non-prescriptive, recommended principles made by the Council that govern all listed entities’ internal systems and processes to achieve good governance outcomes and promote investor confidence in the market.
  • If a listed entity has a financial year ending 31 December the new Principles will come into effect for the financial year ending 31 December 2020.  Listed entities with a financial year ending 30 June will have the new Principles come into effect for the financial year ending 30 June 2021.
 

ASX and Hayne provide mandate for boards

The ASX Corporate Governance Council in releasing the 4th Edition of the Corporate Governance Principles and Recommendations hot on the heels of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry: Final Report delivered to us by the Hon Kenneth Hayne AC QC provides a powerful mandate for all Australian boards to drive leading practice corporate governance.  

Post Hayne – which way from here?

‘Would you tell me, please, which way I ought to go from here?’ Alice said to the Cheshire Cat.  ‘That depends a good deal on where you want to get to, said the Cat.  We are all familiar with this sage advice from a fictitious cat and now we are left in no doubt which road Justice Hayne wants Australian corporations to travel – he makes it all very clear in his final Banking Royal Commission Report and there are very strong messages around board oversight.  

The big banks and executive remuneration – where to from here?

At its annual general meeting yesterday, 33.4 per cent of ANZ’s investors rejected its executive remuneration report – well over the 25 per cent threshold required for a first strike.  The ANZ Board is a relatively low scorer compared to Westpac where 64.2 per cent of investors rejected their bank’s remuneration report at the annual general meeting last week. The prize, however, for the biggest backlash against a remuneration report goes to NAB which scored a record 88.4 per cent rejection by its investors yesterday.