Gavin Parsons & Associates recently proudly co-presented with Counsel, Geoffrey McDonald at Chartered Accountants Australia and New Zealand.
The event was attended by accountants, lawyers and insolvency practitioners. The solicitors from our firm that presented were: Gavin Parsons, Daniel Rappoport and Ryan Owens.
The seminar concerned the hot topics of:
· Asset protection;
· Safe harbour; and
· Third party liability for breaches of Commonwealth statutes.
For those of you who may be interested, the slides that were presented can be viewed at:
What is Safe Harbour and when will it apply?
Since 19 September 2017, directors have been permitted to enter the “safe harbour”. What is it? And when will it apply?
Subject to navigating the harbour safely, the reform can provide for protection to directors from personal liability for insolvent trading.
The carve out to insolvent trading (incurring new debts when the company is insolvent or will become insolvent as a result) applies from the time the director starts to suspect the company is or may become insolvent.
However, for the carve out to apply, not only will one or more course/s of action be required to be “start[ed] to be developed”, but action will be required to be taken in accordance with it/them, within a reasonable time. In addition, the relevant course/s of action will need to be reasonably likely to lead to a better outcome for the company.
Not all debts are covered. These new debts need to be incurred directly or indirectly in connection with the particular course/s of action.
There is a risk that a director can get it wrong. For instance:
1. At the time that the subject debt is incurred: the company needs to have been paying the entitlements of its employees at the time/s that they fall due; and the company needs to have been giving returns, notices, statements, applications or other documents as required by taxation laws. If that failure amounts to less than substantial compliance with the matter concerned or is one of 2 or more failures to do any or all of those matters during the 12 month period ending when the debt is incurred (e.g. before the debt is incurred), the carve out does not apply (subject to a Court order being made);
2. The Court may find that the course/s of action was not reasonable likely to lead to a better outcome for the company;
3. The Court may determine that the particular course/s of action was not commenced within a reasonable time.
There are also a number of disabling features post appointment (if the course/s of action fails and an administrator or liquidator is appointed). For instance, the director may fail to comply with notices or demands made by a liquidator (e.g. a s 530A notice). In that case, the director will ordinarily be prohibited from arguing a carve out applies (even if the course of action was reasonably likely to lead to a better outcome). Again, this is subject to a Court order being made.
Generally, the potential course/s of action that may be developed are not prescribed (and are theoretically unlimited). Realistically, it will depend on the size and nature of the company. For instance, these may include:
1. Operational restructuring (to identify cases of operational underperformance and development of strategies to improve performance);
2. Debt refinancing or consolidation;
3. Financial restructuring via negotiations with creditors and/or the conversion of debt to equity;
4. Sale of business assets.
Directors need to be careful that when the time comes they assert that a particular course/ of action was developed and the liquidator determines (in their view) that not only was the course of action not reasonably likely to lead to a better outcome, but that the director has now provided them with proof of insolvent trading (or at least a number of the relevant elements).
Directors also need to be conscious of the fact that the carve out only applies to insolvent trading (and not other potential contraventions including those relating to director duties and/or void transactions). Further, a course of action may actually amount to a void transaction.
An interesting issue that arises is whether or not these provisions may conflict with the ipso facto reforms. For instance, if an administrator is appointed, there may be some benefit to the prevention of certain creditors using ipso facto clauses in any relevant contracts. In some circumstances, this could reasonably lead to a better outcome than any informal course of action.
There is also the issue with public companies and their ASX continuous disclosure obligations. One of the presumed benefits of the safe harbour reforms are that these course/s of action are developed outside of a formal appointment. Here, the benefit of such privacy may be immediately undermined.
Finally, advisors (accountants, insolvency practitioners and the like) need to be careful. There is potential liability at stake here given that if they are involved in the implementation of the course/s of action they could be held to have been knowingly involved in the transaction or a shadow director. Further, the director may cross-claim against them in respect of “negligent” advice.
All in all, there are many risks and uncertainties at play. The safest course of action may simply be to appoint an administrator.
If you have any questions about safe harbour provisions, please call us on (02) 9262 4471.