New “Safe Harbour” legislation provides directors of financially troubled companies the opportunity to attempt to ‘trade out’ of insolvency, in certain circumstances, without the risk of adverse insolvent trading repercussions.
Prior to these amendments, the legislative framework for insolvent trading was among the strictest in the world, and often resulted in companies entering into voluntary administration or liquidation prematurely.
Directors of companies in financial distress will now have safe harbour protection from liability for incurring debts when they start developing one or more courses of action that are reasonably likely to lead to a better outcome for the company than the immediate appointment of an administrator or liquidator.
However, directors:
must meet certain requirements to ensure coverage by the safe harbour protection; and
must not continue trading in circumstances where the protection has come to an end.
The director/s of a company seeking safe harbour protection will need to demonstrate that a reasonable possibility existed that a better outcome for the company would result from their choice of action.
Other determinative factors as to whether a director will be afforded safe harbour protection include whether the company is continuing to meet employee entitlements and tax reporting obligations, and whether the director/s remained properly informed of company’s financial position, whether advice was sought from an appropriately qualified advisor, and whether the director/s ensured the company maintained appropriate records.
The safe harbour protection will come to an end, and the director/s will be at risk of insolvent trading liability if:
the director fails to take course of action in a reasonable period;
if the course of action ends;
if the course of action is no longer likely to lead to a better outcome; or
upon a liquidator or administrator is appointed to the company.
Contact Dan Creevey or Alex Geokas on 07 3009 6555 for more information on how to ensure you are afforded safe harbour protection where your company is facing financial difficulty.