Have you benefited from insolvency safe harbour?

Monday, 06 September 2021

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Simon Mitchell
Senior Policy Adviser, Advocacy, AICD

    The government has announced the appointment of a panel to conduct a three-month review of the insolvent trading safe harbour. The review will examine whether the safe harbour is achieving its objectives, including giving financially distressed but viable companies breathing space to restructure their affairs. The AICD is seeking views from directors with experience of the safe harbour to inform our response to this important review.

    The AICD was a key industry proponent of the development and ultimate parliamentary passage of the insolvent trading safe harbour reforms in 2017. The AICD saw there was considerable potential for an alternative to formal insolvency processes that would allow directors of ailing companies to take steps to turnaround distressed businesses for the benefit of all stakeholders, and the economy overall.

    The safe harbour provisions under section 588GA of the Corporations Act provide directors with a defence to being personally liable if they are  a director of a company that is insolvent, or there are reasonable grounds for suspecting it was insolvent, when it incurred certain debts. The safe harbour applies where a director, after beginning to suspect a company may become or be insolvent, starts developing one or more courses of action that are reasonably likely to lead to a better outcome than the immediate appointment of an administrator or liquidator.

    Access to the safe harbour is conditional on meeting employee entitlements, tax reporting obligations and directors fulfilling existing obligations to provide assistance in the event of administration or liquidation.

    The AICD has produced a Director Tool to assist directors understand and comply with the safe harbour provisions, available here.

    Separate from the safe harbour provisions, federal parliament in March 2020 also passed the temporary COVID Safe Harbour that provided broad protections from director personal liability in the event a company trades while insolvent. The COVID Safe Harbour expired on 31 December 2020.

    The Review

    The long-awaited review will examine whether the safe harbour is achieving its objectives through encouraging directors to seek advice early on how to restructure and save financially distressed but viable companies, rather than closing down prematurely to avoid personal liability.

    In examining the safe harbour, the review will specifically assess:

    1. The conduct of directors, including decisions to seek advice about the company’s financial position;
    2. The conduct of directors of small and medium-sized enterprises (SMEs) and any particular issues experienced by these directors when engaging with financial distress;
    3. The interests of creditors and employees of those companies, including benefits gained under a successfully implemented restructure or turnaround plan or in formal insolvency processes;
    4. The effectiveness of the underlying prohibition on insolvent trading and associated penalties; and
    5. The role of advisers.

    The review will be chaired by Ms Genevieve Sexton, with Ms Leanne Chesser and Mr Stephen Parbery as panel members. The review will run for a three-month period, between 24 August 2021 and 23 November 2021.

    We understand a consultation paper will be released shortly. The AICD will be lodging a submission in support of the safe harbour (discussed below) and hopes to participate in industry roundtables.

    Further detail on the review and its terms of reference is available here.

    AICD preliminary position

    The AICD remains of the view that the safe harbour is an important ongoing reform to Australia’s insolvency and restructuring regime. The safe harbour promotes a dynamic approach by boards to attempting to resolve financial difficulties of businesses of all sizes without resorting to formal insolvency. Importantly it is consistent with a modern economy focused on promoting entrepreneurship, responsible risk taking and employment.

    There is limited visibility of the use of the safe harbour by Australian businesses as there are no reporting requirements. In addition, the safe harbour and its key concepts have not been tested in court, making it difficult to conclude whether provisions are sufficient to achieve the objectives of the reform.

    However, the AICD’s preliminary discussions with members and stakeholders indicate that the safe harbour is being utilised and has been an important protection for many directors in seeking to navigate  challenges of restructuring financial distressed businesses. It has resulted in positive restructuring outcomes that have benefited key stakeholders, including employees, when the alternative to safe harbour would have been a value destructive insolvency process. We also understand the safe harbour has played an important role in enabling businesses to continue to trade and preserve employment during current COVID restrictions and following the end of the JobKeeper program.

    The AICD recognises there may be areas for improvement in the design of the safe harbour provisions and is asking for member feedback on use of the safe harbour, including potential changes.

    Call for assistance

    The AICD is seeking views from company directors on the safe harbour to inform our response to the consultation. We would greatly appreciate feedback on:

    • Director experience with the use of the safe harbour;
    • Director views on the extent to which the safe harbour has been successful in achieving its objectives; and
    • Whether any changes should be made to the safe harbour provisions.

    We are keen to hear from directors across all sectors, including directors of listed companies, SMEs and not-for-profits.

    Please email comments to policy@aicd.com.au or smitchell@aicd.com.au. We are also happy to arrange a short call to discuss director experience with the safe harbour. All feedback will be kept confidential.

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