Safe harbour in a (global pandemic) storm

19 March 2020

Safe harbour is a statutory process which, if correctly implemented, permits directors to avoid personal liability from insolvent trading. In essence, it is an alternative to the appointment of administrators and allows company directors to implement a turnaround or restructure without the risk of personal liability should the company fail.

Strong market conditions since safe harbour’s enactment in 2017 has meant that safe harbour has not really been tested.  However, that has all changed. The market volatility and losses prompted by the novel coronavirus will be an acid test for safe harbour.

There are eligibility conditions on safe harbour. The conditions include the payment of all employee entitlements (on time) and compliance with taxation lodgement obligations.

Safe harbour is about the plan – not the outcome

Safe harbour is not tied to the end result. Rather, safe harbour concerns itself with planning, implementation and monitoring of a strategy that is reasonably likely to lead to a better outcome than the company immediately appointing a voluntary administrator or liquidator.

Safe harbour implementation

Safe harbour necessarily operates in challenging and uncertain environments.

Some considerations that must factor into the safe harbour plan are:

  • The directors need to obtain a clear understanding of solvency and what drivers are affecting it. Solvency is largely driven by cash flow position and working capital. The case law distinguishes between temporary illiquidity and inherent or systemic financial weakness.
  • Is the turnaround plan reasonably likely to lead to the better outcome than the immediate appointment of a liquidator? What confidence does the director have in the outcome? Is that confidence reasonable and evidence based?
  • Advice from an appropriately qualified advisor. The appropriately qualified advisor is experienced and, most importantly, objective. They can advise what is probable and what is not and can challenge internal assumptions and practices. Their role also involves monitoring the implementation plan to ensure that the plan, once struck, is on track. The advice team will usually comprise a commercial/accounting advisor and a legal advisor.

Early intervention is key

Invariably, early intervention has the best prospects of success. Early interventions tend to benefit from having more options, more time and more money or other capital (and less debt).

Contact Mitchell Downes if you need advice on what options are available to you.