The big play of the Safe Harbour Provision

What is the Safe Harbour Provision?

The defence to insolvent trading under section 588GA of the Corporations Act 2001 (Cth) (“the Act”) may be triggered once a director of a company becomes aware of his business’s possible insolvency.  The safe harbour protection encourages companies and their respective directors to take decisive action to protect their business and keep it trading (“the Safe Harbour Provisions”).

Following the introduction of the Safe Harbour Provisions in September 2017, we are now awaiting the Federal Government to conduct its independent review of the (Safe Harbour Provisions) provisions, which was due to be done in September 2019.  While this article will critique the vague nature of the definition under the Act, it shall discuss the success of the Act since its commencement. The definition in the Act defines Safe Harbour as “taking course of action reasonably likely to lead to a better outcome for the company”.

Safe Harbour Provisions- The Issues

Since the implementation the of Safe Harbour Provisions, a common issue facing practitioners is the lack of definitions contemplated by the Act. For example, the Act does not specify what constitutes a ‘better outcome’ or how this outcome would be measured, nor does the Act indicate how ‘reasonably likely’ from the definition, will be measured or assessed. The vague nature of the definition leaves it arguable whether a “better outcome for the company” is inclusive and considerate of the positions of directors, shareholders or creditors. From the above mentioned, the legislation gives no indication in what a better outcome would mean for the abovementioned stakeholders. Our view is that the position of creditors should be at the forefront of this consideration and directors must act bona fide in the interests of a company as a whole. [1]

The legislation does not require the director to prove that a course of action adopted will lead to a better outcome, but the legislation does require the director to adopt and implement a possible course of action that could lead the company to be solvent. This is problematic as the legislation offers no measure to judge the course of action implemented and it will be unable to critique whether it will (or may) yield a better outcome for the business.

Another issue is the legislation’s lack of qualification for ‘appropriate qualified entities’, which may cause directors confusion on who to approach for advice. In assisting directors to make careful selections of appropriate entities, directors should ensure that appropriate entities hold professional indemnity insurance and have skills and expertise in:

  • Turnaround plans;
  • Assessing the insolvency of the company; and
  • Expertise in advising on entrepreneurial and innovative measures to assist the insolvent company.

Benefits of the Safe Harbour

The aim of the Safe Harbour Provisions is to allow directors to effectively implement ‘business rescue plans’. They also benefit directors by providing an alternative to immediately placing a company into voluntary administration proceedings (or being forced into it by other trade creditors), and therefore affords the company’s directors more time to reach agreement on how to handle their insolvency.

Measuring Success of Safe Harbour Provisions

Many commentators remain hopeful that Safe Harbour Provisions will encourage a shift in current business culture and facilitate a more efficient restructuring process to achieve improved outcomes for the Australian economy. The success of this legislation, will depend on directors confidently coming forward about their business’s insolvency and trusting that their selected course of action (restructuring plan or strategy) will result in a better outcome. Although we do not have sufficient substantive to data measure and judge the legislation’s success, commentators believe the Act will likely lead directors engaging in innovative and entrepreneurial measures to save their company. This will in turn force directors to apply themselves in order to devise new strategies that may result in restoring the financial solvent position company.

Possible Reasons for delay in announcement of the independent review

Since there is no decided case law on this legislation in Australia, we hope the federal government will use the Independent Review to clarify some of the uncertainties that are found in the provisions. Nevertheless, many commentators concede that a possible reason for the delay of the review announcement is due to the fact that there has not been sufficient time to form opinion and recommendations about safe harbour, since its introduction in late 2017.

How can we help?

If you want to know how the implications of the Safe Harbour Provisions will affect your business, whatever the size or scale, please contact the team at Rostron Carlyle Rojas Lawyers on (07) 3009 8444 to discuss any queries or concerns you may have.

Please note that this article has been prepared by Takudzwa Makusha, Law Clerk and settled by Levi Smouha, Partner of Rostron Carlyle Rojas Lawyers. Its contents are for general information purposes only and does not by any means constitute legal advice, nor should it be relied upon.

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