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What is safe harbour?
A common fear for directors when a company is insolvent or nearing insolvency is their personal liability for debts incurred by the company, if the company continues to trade and then ultimately goes into liquidation. This can lead to the pre-emptive appointment of a voluntary administrator or liquidator; or alternatively directors taking the ostrich approach believing there is little they can do; neither of which may be in the best interest of the company’s stakeholders.
Effective from 19 September 2017 a new section 588GA (and consequential provisions) was inserted into the Corporations Act 2001; colloquially referred to as ‘safe harbour’. Safe harbour protects company directors from liability for insolvent trading in the event that the company goes into liquidation.
The purpose of safe harbour relates to, and the protection it affords depends on, directors taking prompt, concrete, reasonable steps to turnaround or restructure the company with the benefit of appropriate external advice.
Restricted entry to the harbour
> There are very strict rules governing when the safe harbour protection is available to directors.
> It is only available to directors who:
> The safe harbour only extends to debts incurred directly or indirectly in connection with the course of action or its development.
> Safe harbour commences at a particular time; being the moment the director suspects insolvency and decides to do something about it. It should be documented
The “reasonably likely to lead to a better outcome” test
> Whether a course of action is reasonably likely to lead to a better outcome is assessed at the time the decision is made; not with the benefit of hindsight.
> The threshold of ‘reasonably likely to lead’ is not as high as the words may suggest. It is a possibility that is not ‘fanciful’ or ‘remote’; but ‘worth noting’.
> There are some indicative factors to determine whether a course of action was reasonably likely to lead to a better outcome; namely whether the director has:
> Directors seeking to claim the benefit of safe harbour bear the evidentiary burden of establishing:
> The onus then shifts to the liquidator to prove, on the balance of probabilities, the course of action taken was not, at the time, reasonably likely to lead to a better outcome.
Meeting ongoing director obligations
What to do?
If you suspect your company is insolvent or nearing insolvency, immediately contact us for advice so we can assist in navigating you into the safe harbour.
This article is general information only, at the date it is posted. It is not, and should not be relied upon as, legal advice. This article might not be updated over time and therefore may not reflect changes to the law. Please feel free to contact us for legal advice that is specific to your situation.