The key test for relying on safe harbour protection is that the turnaround plan being considered must be reasonably likely to result in a better outcome than the immediate winding up or administration of the company.
For the purposes of working out whether a course of action is reasonably likely to lead to a better outcome for the company, a court will consider the following non-exhaustive list of factors:
- Whether the director is properly informing themselves of the financial position of the company.
- Whether the director is taking appropriate steps to prevent misconduct by officers.
- Whether the director is taking appropriate steps to ensure the company is keeping appropriate financial records.
- Whether the director has obtained advice from an “appropriately qualified entity”.
Practically speaking though, what exactly is a “better outcome”? Well we believe the following are very simple ways to determine what a better outcome is:
- Creditors receive a better return through the turnaround than if the company were immediately liquidated/placed into administration.
- The turnaround allows the company’s business to survive in whole or in part.
A further consideration when considering what a better outcome will be is whether it must be a better outcome for both the company’s shareholders and creditors or just creditors. Ultimately it will be a case by case assessment, however as a general rule we believe it’s important for all stakeholders’ interests to be considered when planning a turnaround.