On 19 September 2017 the safe harbour laws commenced which enabled directors to turn around struggling companies without exposing themselves to personal liability under Australia’s insolvent trading laws.
This protection from personal liability is only afforded to directors who have taken these very defined and strict steps:
- The director(s) developed (and enacted) or took a course of action that at the time was reasonably likely to lead to a better outcome for the company than an immediate administration or liquidation;
- The director(s) ensured that the company complied with its obligations to pay its employees which includes their superannuation;
- The director(s) ensured that the company complied with its tax reporting obligations; and
- The director(s) met their obligations to assist administrator, liquidators or controllers and provide them with the company’s books and records and Report to Affairs once the company is externally administered.
It is critical to note that the safe harbour protection only extends to debts that arise as a result of the developed plan or course of action.
Building and Construction Focus
In the last 12 months the construction and building sector has been hit with a significant down turn. There has been a 3% decrease in the value of work in the new residential space and the value across the total construction industry is down 6.5% (Australian Bureau of Statistics 8782.0.65.001 - Construction Activity: Chain Volume Measures, Australia, Mar 2019).
Furthermore, building approvals in the private house market are down 16.7% and in the unit market, prices are down by 26% (8731.0 - Building Approvals, Australia, May 2019). We have also seen stark reduction in value across the Sydney basin, for example Winston Hills is down 13.64% over the past 12 months (Property Value by Core Logic).
When combined, these statistics reveal that companies involved in the building and construction sector could well be facing significant cashflow shortages and therefore may be ‘insolvent’ on a strict section 95A Corporations Act 2001 (Cth) test.
This presents a serious risk to the directors and their personal assets if a liquidator is ever appointed.
To minimise this risk, the safe harbour regime provides a mechanism by which a director can protect their personal exposure while trying their best to explore all possibly avenues to turn around the company.
Hypothetical Example
A construction supplies company called SupplyCo have had two large clients enter into liquidation owing them $200,000. This has resulted in SupplyCo not being able to pay its own wholesalers and having a debt of $100,000 with them. They have also struggled to make payroll for the last month.
At this stage SupplyCo has more creditors than cash in the bank.
However, SupplyCo have just won a large government tender which is worth $1,000,000 over the next 10 months. The problem is that the wholesalers have capped SupplyCo’s account and are now demanding payment of the amounts owing.
Under the safe harbour regime, SupplyCo have appointed Frank Law to be their safe harbour expert. Frank Law works with SupplyCo’s directors, accountant and financiers to put in place a plan which:
- Involves the negotiation of a payment plan with the wholesalers to ensure that goods are supplied; and
- Involves the raising of a credit facility to even out cashflow and ensure creditors are paid and payroll is met;
If the directors had not appointed a safe harbour expert, they would have breached the duty at s588G to not trade whilst insolvent.
Key Take Away
The safe harbour regime is a great tool for directors to use to minimise their personal risk.
If you have further questions about the safe harbour regime, please contact James Frank at jfrank@franklaw.com.au.
This is not legal advice.
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