Turning around a struggling business can be a serious challenge. Companies can’t always be saved, even with the best intentions, and that can leave directors open to personal liability.
The team at Business Savers are experts at helping businesses that are dealing with financial strain. We understand each situation is unique, and our Small Business Restructuring plans are designed to achieve the best outcome possible.
If you’re turning around a failing company, Business Savers can help you access Safe Harbour provisions and guide you through the restructuring process.
What is Safe Harbour?
Safe Harbour is a legal provision that’s designed to protect company directors from personal liability when making a genuine attempt to save the business from financial distress.
One of the biggest challenges that comes with saving a business is the need to continue trading. You can’t save the business if it’s shut down or Liquidated, but operating a failing business puts directors at risk of insolvent trading.
Insolvent trading is illegal in Australia and comes with serious civil and criminal penalties.
Happily, Safe Harbour laws can protect you from personal liabilities that may arise while you attempt to save the business from insolvency, Liquidation or Administration. We call this a “solvent restructuring.”
Solvent restructuring typically leads to better outcomes for directors, employees, shareholders and creditors.
Overview of Australia’s Safe Harbour Laws
Safe Harbour is covered by section 588GA of the Corporations Act 2001. Under the Corporations Act, company directors may be protected from personal liabilities while attempting to turn the business around.
The major benefit of Safe Harbour is that it gives directors a better chance of saving the company. Having the ability to execute a restructuring without fear of insolvent trading allows directors to reach a better outcome.
Safe Harbour can be claimed by directors that have made an honest and reasonable attempt to save the company. Directors also need to:
- Pay employee entitlements as and when they are due
- Ensure tax returns, statements and applications are up to date
Paying employee entitlements and tax liabilities can be a challenge for struggling businesses. These requirements are a test of whether your company can benefit from a restructuring. If you can’t meet these requirements, Voluntary Administration or Liquidation may be the more appropriate solution.
When Can I Claim Safe Harbour?
You can claim Safe Harbour if you are the director of a company and you take an action that is “reasonably likely” to improve the outcome. Some of the appropriate steps you can take to improve the company’s situation include:
- Preventing staff misconduct
- Keep detailed financial records
- Stay up to date on the company’s financial situation
- Create a Restructuring Plan
- Seek professional advice from a Qualified Adviser
Doing these things is the best way to indicate your good intentions when restructuring or saving the company. You may need to prove that you took these sorts of actions if your Restructuring Plan fails and you wish to claim Safe Harbour.
Steps to Claiming Safe Harbour in Australia
Safe Harbour is only available to company directors that are making a genuine attempt to save the business. You don’t need to use a formal insolvency procedure (such as Voluntary Administration) to be eligible for Safe Harbour. However, it’s important to document your efforts and show your intention.
To claim Safe Harbour in Australia, you should develop a formal Restructuring Plan to act as a roadmap. This document sets out what needs to be done, and it can be used as proof of your good intentions. Your Restructuring Plan should include:
- Objectives. Outline the objective of the Restructuring Plan. This may be to return to solvency, but any outcome that is “better” for company stakeholders is a valid objective.
- Your strategy. Provide details about how you will reach your objective. Be specific, including individual tasks, task owners and how each action will contribute to delivering a successful outcome.
- How success will be measured. You will need to measure your progress along the way. Include information about how success will be monitored, and key indicators that the plan is having the desired effect.
- Professional feedback. Restructuring Plans should be developed with input from Qualified Advisers. Professional advice can greatly improve the chance of success. Incorporate any advice into your Restructuring Plan document.
- Financial audit details. Conduct a complete audit of the company’s financial details and include that information here.
You are responsible for demonstrating that Safe Harbour applies to you. If your Restructuring Plan fails, you may need to prove your eligibility to the Liquidator or ASIC.
What Debts are Covered by Safe Harbour?
Safe Harbour provisions only offer protection from “reasonable” debts that are incurred while attempting to save the business. This includes debts that are directly or indirectly related to the restructuring attempt.
For instance, your Restructuring Plan may incur expenses like:
- Hiring a Qualified Adviser or restructuring advisors
- Applying for loans or supplier credit
- Purchasing new equipment
- Hiring new employees
- Day-to-day operating expenses (such as wages and taxes)
Each of these debts is considered reasonable. If the Restructuring Plan failed, directors claiming Safe Harbour would not be personally liable for these types of debt.
Safe Harbour may also protect directors against more significant expenses, but you should think carefully before making major purchases or significant changes to company assets, processes and operations.
The Consequences of Insolvent Trading
Safe Harbour provisions are specifically designed to protect directors from the risk of insolvent trading. Not only is insolvent trading illegal in Australia, it contravenes the responsibility of all directors to act in the best interests of the company.
Insolvent trading carries civil and criminal penalties:
- The civil penalties of insolvent trading include fines of up to $200,000
- The criminal penalties of insolvent trading include a fine of up to 2,000 penalty units (currently $626,000) and imprisonment for up to 5 years
Directors that are found guilty of insolvent trading may also be personally liable for repaying debts that were incurred due to insolvent trading.
There’s no limit to personal liability for insolvent trading, and this may cause directors to go bankrupt. Directors that become bankrupt due to personal liabilities will also be disqualified from acting as the director of a company for a period of up to 5 years.
Restructure Your Company and Get Back On Track with Business Savers!
Saving a company that’s in financial distress is hard work. There are dozens of factors at play, and developing an effective plan requires input from experienced professionals.
If your business is facing uncertain times, get in touch with Business Savers. Our experienced advisers have a wealth of experience in Creditors’ Voluntary Liquidation, Members’ Voluntary Administration and Restructuring. That allows us to develop a plan that gives your business the best chance of survival.
You can contact us online to make a booking, or call us for a confidential discussion about your situation.