Safe Harbour for Directors
Pursuant to the insolvent trading provisions in section 588G(2) of the Corporations Act 2001 (“the Act”) a director can be held personally liable for certain debts incurred by the company if the company was insolvent at the time, or becomes insolvent by incurring those debts.
The safe harbour provisions in section 588GA(1) of the Act provide directors relief from this personal liability and the opportunity to continue to trade the company under distressed circumstances, provided they are taking a course of action that is reasonably likely to lead to a better outcome for the company and its creditors, compared to the appointment of an administrator or a liquidator.
It is recommended that directors consider the safe harbour provisions from the particular time they start to suspect the company may become or be insolvent.
Are you eligible to access safe harbour?
Section 588GA(4)(a) of the Act outlines that directors are not eligible for the safe harbour provisions in relation to debt incurred if the company is failing to do one or more of the following:
- Pay all employee entitlements, including superannuation contributions, as and when they fall due;
- Meet its taxation law reporting requirements
Development of a course of action:
The safe harbour protections only extend to debts which are incurred directly or indirectly in connection with, or the development of, the course of action.
In working out whether a course of action is reasonably likely to lead to a better outcome for the company, regard may be had to whether the director:
- is properly informing himself or herself of the company's financial position; or
- is taking appropriate steps to prevent any misconduct by officers or employees of the company that could adversely affect the company's ability to pay all its debts;
- is taking appropriate steps to ensure that the company is keeping appropriate financial records consistent with the size and nature of the company; or
- is obtaining advice from an appropriately qualified entity who was given sufficient information to give appropriate advice; or
- is developing or implementing a plan for restructuring the company to improve its financial position.
DW Advisory is able to advise on the course of action to be taken and whether it will result in a better outcome for the company.
Ongoing obligations during safe harbour:
To continue to obtain the benefit of the safe harbour provisions, it is not sufficient for directors to only prepare a safe harbour plan. The Act imposes specific ongoing obligations on directors, including:
- The company’s financial reports are properly maintained, are available, accurate and up to date;
- Directors are taking adequate steps to inform themselves of the company’s financial position;
- Directors are adhering to their statutory duties in relation to the company’s management – including the prevention of misconduct by officers or employees which may adversely affect the company’s ability to pay all its debt;
- Directors are taking adequate steps to ensure the company complies with the course of action;
- Directors are adhering to all their obligations and requirements under the course of action;
- During the implementation of the course of action:
(i) All taxation lodgements are up to date and all taxation obligations are met.
(ii) All employee entitlements are met at the time they fall due.
The safe harbour will continue to apply until the directors or the Company:
- stop taking the course of action;
- the course of action stops being reasonably likely to lead to a better outcome; or
- the company goes into administration or liquidation.
This requires the Directors (and their advisors) to continually monitor the plan to ensure it continues to be reasonably likely to lead to a better outcome
If the company goes into administration or liquidation, directors may also lose the protection of the safe harbour where the directors fail to:
- provide a completed Report on Company Affairs and Property (ROCAP) to the administrator or liquidator;
- deliver the books of the company as required under the Act;
- give information about the company when required; and/or
- assist the administrator or liquidator.
Safe Harbour – Temporary relief in response to COVID-19
On 24 March 2020, the Coronavirus Economic Response Package Omnibus Bill 2020 inserted a new section 588GAAA into the Act which grants temporary relief for financially stressed businesses, including an additional safe harbour from insolvent trading liability in respect of debts incurred:
- in the ordinary course of the company’s business; and
- during the six-month period commencing from 25 March 2020.
On 7 September 2020, the Australian Government announced that the temporary relief would be extended until 31 December 2020.
The temporary provisions in section 588GAAA provide relief from insolvent trading provisions only. This temporary relief does not extend to provide relief from statutory and common law director’s duties, including the duty to act with care, diligence and good faith, and duty to not improperly use their position to gain advantage for themselves or someone else or cause detriment to the corporation.
The temporary relief has not been continued for any of the 2021 outbreaks of COVID and the resulting lockdowns.
To date, there is little guidance available for directors in respect of the safe harbour provisions.
If you notice any of the following warning signs, please contact our team to discuss how we can assist you and your company:
- solvency concerns
- cash flow difficulties
- working capital constraints
- ongoing losses
- dispute among directors and shareholders
- inability to obtain finance