The Federal Government has recently announced a series of measures designed to lessen the speed at which COVID-19 spreads across the community.
These measures include banning gatherings of over 500 people outdoors or 100 people indoors, self-isolation for 14 days for people entering Australia and encouragement of social distancing measures.
While our community grapples with the social impact of COVID-19, there will also be an inevitable financial impact for many businesses as supply chains are cut off, customers alter purchasing decisions and revenues fall while overheads continue to accrue.
Acting early is critical when dealing with potential or actual financial distress. During these trying times, it’s important for businesses to know there are a range of options available to management and boards as part of a business recovery process to avoid business failure.
A key tool for businesses to be aware of is what’s known as “Safe Harbour” protection. Safe Harbour protection refers to provisions in the Corporations Act which came into effect in 2017, which allow directors of entities facing financial difficulties to implement a restructuring or turnaround plan without risking personal liability under Australia’s insolvent trading laws. Safe Harbour is often the catalyst to commence a formal business recovery or turnaround process in a structured and orderly way when the prevailing environment within the business feels anything but.
The Safe Harbour provisions protect a director from potential insolvent trading liability if 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.
Legislative guidance for directors regarding steps they can take to demonstrate they were developing a course of action that was reasonably likely to lead to a better outcome include:
- Keep themselves informed of the company’s financial position
- Take steps to prevent misconduct by officers and employees of the company
- Take appropriate steps to ensure the company maintains appropriate financial records
- Obtain advice from an appropriately qualified adviser
- Take appropriate steps to develop or implement a plan to restructure the company to improve its financial position.
In order for directors to qualify under Safe Harbour protection, the following requirements apply:
- Directors must continue to act honestly and meet their fiduciary duties to act in the best interests of the Company
- Directors must ensure that the company complies with its obligation to pay its employees (including their superannuation)
- Directors must ensure that the company meets its tax reporting obligations.
Developing a formal plan for business recovery and taking steps to implement it within the Safe Harbour framework gives directors an opportunity to prevent business failure without taking on the risk of personal liability.
If your organisation is experiencing financial difficulty, please contact a member of our Business Restructuring team who understand the options and turnaround strategies that may be available to your unique situation. Our team has the experience and trusted relationships with key stakeholders, such as financiers and relevant statutory bodies, to facilitate the right outcomes for your business.
Please contact us for a free consultation to discuss your business position.
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