This is good news as the laws have typically been difficult for directors in circumstances where a company is facing a financial crisis.
The law doesn’t remove the insolvent trading laws. However, once a director enters a ‘safe harbour’, they are deemed not to be personally liable “where they take a course of action that is reasonably likely to lead to a better outcome for the company and the company’s creditors as a whole”.
This legislation is awaiting royal assent which is expected in the very near future.
How to enter the harbour?
The ‘better outcome test’ is the legislative equivalent of being safe to fail. The onus is on directors to, amongst other things, obtain expert advice, and prepare a restructuring plan with a demonstrable course of action to find a solution that results in a better outcome than the immediate appointment of an administrator.
This will afford pro-active directors a defence to being held personally liable for debts incurred in connection with the course of action they take.
Successfully restructuring a distressed business is hard to do. The high risk and emotionally charged environment requires compromises and trade-offs. We often see directors judgement clouded due to the risk of being personally liable for the debts they incur.
Most directors have strong relationships with their employees, suppliers and customers and have a genuine desire to restore performance and preserve those relationships, jobs and personal wealth.
The changes don’t remove the role of the courts and subsequently appointed liquidators (if appointed) to call to account those directors and their advisers who purposefully seek to rip people off.
Where can directors obtain advice?
The onus will still be on director to prove that they’ve satisfied the safe harbour qualification criteria Retaining turnaround professionals is a central element of a director’s defence.
If you would like to know more about Safe Harbour or options for early identification of signs of distress and intervention, I invite you to a confidential, no obligation, initial discussion about your company’s situation.
Industry groups like the TMA have published helpful guidelines for its membership to navigate Safe Harbour. However it’s one thing to satisfy the legislative requirements of the Safe Harbour, it’s another to undertake the turnaround.
The legislation supports that advice should be taken from an appropriately qualified advisor and to have evidence of this e.g. documentation of any specific advice sought and obtained, plus the engagement of a recognised turnaround professional.
Why act now?
Whilst the Safe Harbour reform is positive news, the steps to qualifying for entry to the safe harbour require some preparation.
Ultimately recognising early signs of distress and subsequent intervention by company directors when these arise remains the best way to achieve a better outcome for the company.
Angela Haynes is Director, Deal Advisory Restructuring Services at KPMG. Reach her at: ahaynes1@kpmg.com.au or phone 02 8841 2150.
