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Safe Harbour FAQ's

If you suspect your company is insolvent or may become insolvent, its time to act and take measures to ensure safe harbour protections are in place. Find out how!

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Frequently Asked Questions about Safe Harbour

We have collated the most frequently asked questions in one place to help you find quick answers to important matters.

Safe harbour provisions apply when a director identifies that a company is approaching insolvency and develops a plan that will likely lead to a better outcome. When accessed, the safe harbour provisions provide company directors with an exemption from being held liable for trading while insolvent.

Specific details regarding the provisions can be found in s 588GA of the Corporations Act 2001 (Cth).

Being the director of a company that is or may become insolvent is stressful enough, let alone the threat of personal liability. Consequently, the safe harbour defence has been created to encourage directors to keep control of their company while they develop one or more courses of action that will provide the company with the best prospects of returning to financial prosperity.

Safe harbour legislation has been implemented for several reasons including:

  • Allow directors relief from personal liability
  • Provide the best prospects of a restructure and turnaround
  • Help more companies fight their way back from insolvency
  • Greater flexibility for companies and directors
  • Shift director focus from self-preservation to progress and prosperity

A director is eligible to access safe harbour provisions if they can show that they were in the process of taking a course of action that was reasonably likely to have a better outcome than a voluntary administration or liquidation. Some of the factors considered for eligibility include:

  • Maintained financial records
  • Taken steps to prevent misconduct
  • Obtained professional advice
  • Developed and implemented a restructuring plan
  • Lodgement of all relevant tax documentation

You do not need to apply for safe harbour provisions. They simply come into effect once you, as a director, begin to take reasonable courses of action that are reasonably likely to lead to a better outcome for the company. To ensure you are eligible, you should ensure that you are carrying out all your obligations as per the previous question above.

Despite the absence of a defined time period, the provisions do state that attempts to improve the company situation must be completed in a ‘reasonable time frame’.

The best practice is for any restructuring plan to have guidelines with respect to review and potential adjustment. Changes can be made if a restructuring plan remains the best option for the company.

If this ceases to be the case, the company directors should seek professional advice and explore other options such as voluntary administration and liquidation.

Legislative safeguards exist to protect employees and promote compliance with tax obligations. Safe harbour will not apply if:

  • A company has failed to pay employee entitlements multiple times in the 12 month prior to incurring the debt
  • A company has failed to meet its tax obligations including reporting multiple times in the 12 month period prior to incurring the debt.

The safe harbour rules are often referrer to as safe harbour provisions and provide directors with protection from personal liability for insolvent trading. The purpose of this is to provide directors with sufficient time to develop and implement strategies that will provide a company with the change to avoid insolvency. Knowing how safe harbour provisions protect company directors can be the difference between returning to financial prosperity of trading insolvent.

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