Despite being in place since 2017, many directors remain unaware of the safe harbour provisions in s.588GA of the Corporations Act - or their actions are preventing their companies from using it.
Companies in financial distress may qualify for safe harbour protection where the directors start developing one or more courses of action which are 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.
Unfortunately, anecdotal evidence suggests that many companies aren’t eligible for safe harbour protection because they don’t meet the criteria, which includes paying their employee entitlement obligations in full and on time, meeting their tax obligations and have existing and up-to-date D&O insurance.
For directors who are juggling finances to pay creditors or think that they can catch up overdue tax or super payments at a future date, these are serious warning signs they should heed as directors. Directors can be exposed to a range of penalties, including civil or criminal penalty orders, or orders to pay compensation for debts incurred by the company whilst insolvent.
A lifeline for the business is available if directors act promptly - the sooner they engage with appropriately experienced experts to explore their options, the greater number of options the company will have.
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.
How does governance help with safe harbour?
Having solid processes, procedures and controls in a business is a key element of good governance, as is the continued monitoring by the directors that these systems and processes are operating properly.
So, what do directors need to do to from a governance perspective to keep as many financial lifeline options open as possible?
- proactively and regularly monitor the company’s financial position to understand whether there is an increasing risk of financial distress;
- ensure that the company has appropriate systems in place to track the on-time payment of all liabilities;
- seek regular confirmation from management that the liabilities critical to retaining safe harbour eligibility are being paid on time;
- critically evaluate whether the company’s systems and processes accurately monitor its operating position and support the board’s decision making;
- be realistic about whether the strategy to improve business performance is working or not – don’t leave it too late to ask for expert legal, financial and specialist governance advice; and
- ensure that governance processes are implemented that support the turnaround ( board papers and minutes appropriately document the board’s activities, and how and why the desired outcome is still a ‘better outcome’).
By focusing on good governance, directors are not only fulfilling their legal duties, but they’re also doing the right thing by their employees and creditors.