Article:

How is ‘Safe Harbour’ playing out on the ground?

13 September 2018


Darren has spent 10 years in commercial banking building relationships with many people from industries such as legal, banking, finance, property and business services.

Darren has experience in structuring transactions for listed corporate entities in the ASX S&P 200, for unlisted property syndicates, primary and syndicated construction facilities for office, retail and apartment developments. This included negotiation and discussion with a large number of stakeholders, including sponsors, developers, builders, solicitors, government & semi-government authorities, valuers and other banks.
 

1. One year on from “Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017” legislation passing and the introduction of the ‘Safe Harbour’ carve out, how are you seeing the law play out in practice?

There have been lots of articles written about what the legislation means and what it's meant to do, but I think that there is a little bit of uncertainty with some of the definitions within it that aren’t 100% clear.

One of the requirements is that directors can identify that a better outcome would be available using the ‘Safe Harbour’ legislation, but it's not defined who the better outcome applies to. It may be for employees of the company, it may be better off for creditors of the company, for directors themselves or shareholders.

It's hard to balance all of those things. There has to be some trade-off between what the creditor might get and what the employees might get, or whether or not the restructure requires some employees lose their jobs. That definition is quite vague, perhaps deliberately. We won’t know for a couple of years whether or not we’re truly seeing a better outcome.

The other definition was that the legislation recommends that the directors receive advice from appropriately qualified advisers. But what is appropriate and what qualifications they need may differ from small business compared to a large listed company. We need to recognise that large or more complex businesses require a broader range of advice. That might be legal advice, accounting advice, tax advice, financial structuring, or capital raising advice. Receiving appropriately qualified advice is going to be different for everybody.
 

2. There are smaller enterprises that may not be able to afford the same kind of advice that a large, listed company would. What are their options?

You have hit the nail on the head. We do worry that small to medium enterprises (SMEs) won't be able to get that detailed advice. The bigger picture I guess is that most SMEs are not complex, therefore their issues are probably more containable. And I would suggest that most businesses already have a relationship with an accountant and a lawyer, and if they're reasonable accountants and lawyers they should already have an understanding of the ‘Safe Harbour’ Legislation and be able to provide sound advice.

They may not be experts in the field, but that might be sufficient for a SME business with not too many complex problems.

The real difference we’ve seen between SMEs and large complex businesses has come from independent, professional directors where they are not a shareholder. That's where we've really seen those directors be very serious about getting the right sort of advice. Where smaller businesses don't have these kind of directors, they are potentially cutting corners a little bit.
 

3. The law’s explanatory memorandum says: “Our current insolvent trading laws put too much focus on stigmatising and penalising failure.” In your view, has the law been successful so far in changing that stigma and improving turnaround culture?

I think that's an interesting question. For a number of entrepreneurial business owners where the founders are also the directors, I don't really think that the legislation will change their view at all from the experience we have seen. They will continue to be entrepreneurial. They were probably willing to run the risk of corporate failure or personal bankruptcy because that's just the sort of people that they are.

That changes at the larger end of the spectrum where you have listed companies or public companies and professional directors who have recognised the benefits of the new legislation. Rather than run from potential trouble, we’ve seen those directors more willing to engage in a turnaround process. It’s been beneficial, though it hasn’t had as much of an effect as we would have liked to have seen.

I think the very fact that it's been new legislation has meant there’s a spotlight on it, a lot of industries have taken note and that’s a good thing. There has been some stigma around corporate failure and perhaps that’s been put in the basket of rogue operators or bad actors being fraudulent or running away with peoples’ money.

People are recognising that’s not always what’s happening. Unfortunately some businesses do fail, but with the right focus and a turnaround plan some better outcomes can be achieved.
 

4. Are there specific examples or case studies you can point to that show the effects of the law on director mindsets?

It's been a difficult process as directors have gotten their minds around it. We have actually seen for some directors or boards where they have invoked Safe Harbour, they are actually finding it a real struggle, but that’s part of a learning process.

We had one instance where the board was almost paralysed. They invoked ‘Safe Harbour’, they went off to get advice, but of course the advice wasn’t clear cut. It wasn’t all pointing in the same direction. That made them worry, they had to make some tough decisions and it wasn't abundantly clear which option was the best decision. If they were unable to clearly see a winner, did they just have to call it quits and put the company into administration?

I've always been one to suggest that directors need good advice in times of challenge, and I think the more they can do that the better. Even if it still ultimately means that the company can’t be saved.
 

5. What kind of issues or evidence do you think the government will be looking at when they're assessing its effectiveness in a year’s time?

That's a really good question. I think it's been hard at times to put a value on what a corporate failure has cost a community. Clearly if you are one of the individuals affected because you're an employee and you've lost your job, it's pretty substantial. But it's harder for the community at large to look at that.

Do I think it will probably reduce the number of large corporate failures? I think yes and if that’s the outcome, we will be able to say that this legislation has been good for the community. Because if we don't have large scale job losses and large scale losses to creditors for these big businesses then I think that is positive for the community as a whole.

We really won't know whether or not the legislation has truly made a difference to directors until we see a couple of cases probably go through the courts to determine whether or not they have correctly relied upon ‘Safe Harbour’ and whether or not directors down the track have further confidence to use it.