Survey Results on the use of Safe Harbour Legislation; and The New COVID-19 Safe Harbour laws
Safe Harbour Legislation Survey Results
During 2019 Gavin Parsons and Associates (GPA), in conjunction with Geoffrey McDonald, Barrister, conducted a survey of eight (8) leading insolvency firms in NSW, Australia.
The Survey asked the insolvency firms:
On how many occasions in the 2018 and 2019 financial years did:
1. Company Director(s) expressly seek advice about the use of the safe harbour provisions: s588GA of the Corporations Act (Safe Harbour Provisions);
2. The insolvency firm suggest/recommend to Director(s) that they consider the potential application of the Safe Harbour Provisions;
a) And if they did, on how many occasions did they undertake the role of an “appropriately qualified entity” under the Safe Harbour Provisions (s.588GA(2)(d)); and
b) Of these, how many of the companies that the Director/s were Director/s of, subsequently went into liquidation?
3. A director seek to defend a claim by the insolvency firm/ its practitioners on the basis of Safe Harbour Provisions (s588GA(1)). (the Survey Questions)
In response to the Survey Questions, seven (7) insolvency firms recorded “zero” in answer to each of the Survey Questions. Only one (1) insolvency firm recorded “yes” or answered “several” in answer to each of the Survey Questions. (the Answers)
As part of the Survey, GPA received feedback, some of which was requested to be anonymous (the Feedback). Some interesting excerpts from the Feedback are as follows:
• “As the new laws merely require an appropriately qualified adviser to advise on the rescue plan, which is too broad, a pre-insolvency adviser could provide the advice and as such many liquidators would be holding back from doing this work to allow the pre-insolvency types to test it and most likely do it unsuccessfully.”
• “When a director approaches an insolvency firm regarding his/her company the firm is much more likely either to put it in liquidation or, alternatively, administration/DOCA if the company can be saved. As such, it’s easier for the firm to do this/what they have been doing day in day out for years rather than attempt to safe harbour the director which would conflict them out of the liq/admin/DOCA.”
• “It’s too hard and I’m not going to try and learn all the different aspects of these new laws. It’s not something we offer or even consider.”
• “As directors are only in safe harbour/protected from insolvent trading claims and not others such as directors duty breaches and other claims there probably would not be much interest if we did offer the service.”
• “The tax compliance requirements to qualify for safe harbour are too onerous and unrealistic as only a very small percentage of companies facing insolvency don’t owe any tax”.
From the Answers, it is clear that the Safe Harbour provisions are rarely being implemented or used.
The Answers and the Feedback were recently discussed by Mr McDonald at the Association of Independent Insolvency Practitioners (AIIP) Conference in Sydney on 19 May 2020.
The link to the AIIP Conference Webinar is below for your viewing.
Recent Reforms due to COVID-19
As part of the Government’s recent legislative response to COVID-19, further Safe Harbour provisions were introduced to the Corporations Act, at s588GAAA. These provisions, rather than amending existing Safe Harbour protections, create an entirely new mechanism to protect a Director from a breach of their duty to prevent insolvent trading.
Operating for only a six (6) month period from its introduction, though capable of extension if the circumstances of COVID-19 vary, these Safe Harbour provisions are significantly simpler in operation than the original Safe Harbour protection. This is evident from the checklist below.
Checklist for the Recent Reforms
1. Has the company incurred a debt which would otherwise be a violation of s588G?;
2. If so, was the debt incurred in the “ordinary course of business?”;
3. If so, was the debt incurred between 25 March 2020 and 25 September 2020, or a further time provided for by Regulations?;
4. If so, was the debt incurred prior to the appointment of an administrator or liquidator to the company?; and
5. Do you have enough evidence to suggest a reasonable probability of the above existing?
If so, you may be protected by the new Safe Harbour provisions.
Speaking practically, the further Safe Harbour provisions introduced due to COVID-19 are significantly wider in application than the initial protections.
But one of the big questions is: what is in the “ordinary course of business?”
The Explanatory Memorandum to the amendments explains that, amongst other things, a Director is acting in the ordinary course of business if it is necessary to facilitate the continuation of the business. This can include things such as taking out loans to move business operations online, or incurring debts by continuing to pay employees. This indicates that even exceptional measures may qualify for the protection should they be necessary for the business’ continued survival.
While this may operate effectively as a tool for now, it is important to recognise that unlike normal Safe Harbour protections, the new laws have a definite end-point, and there’s no test indicating that by taking the action the Director is salvaging the position of their company.
As such, once the protection lapses, Directors may immediately become liable for trading while insolvent, and their company may be in a significantly worse position than it would have been had it have wound up rather than rely on the protection. This may also negatively impact other companies who have been trading with these insolvent entities, especially if a large number of companies become insolvent at once.
A link to a GPA Seminar on the topic held in late 2018 is below for your viewing.
The original Safe Harbour protections remain limited in scope, hampered by requirements, and offering little benefit to all but the largest of companies who are fully able to take advantage of its protections. As such, there’s been little use, or even consideration, of its provisions.
In comparison, the Safe Harbour measures put in place with COVID-19 are significantly wider in reach, and less onerous to utilise, operating to keep businesses running which would otherwise be wound up due to insolvency. The long-term economic impact of these businesses potentially operating while insolvent with no plan to become solvent in the “ordinary course of business” is yet to be seen, but the provisions remain a potentially useful tool to keep companies afloat on stormy seas.
If you or your staff have any questions or need advice regarding any aspects of the Survey Results, the Safe Harbour legislation, or the COVID-19 Safe Harbour provisions please contact Gavin Parsons by telephone on (02) 9262 4471 or via email at Gavin@gpalaw.com.au.