By way of introduction, insolvent trading occurs when a person is a director of a company at a time when that company incurs a debt and the company is insolvent or becomes insolvent because of the debt and there are reasonable grounds for suspecting the company is insolvent or would become insolvent.
The new safe harbour laws essentially create a “safe harbour” for directors from personal liability for insolvent trading when they begin to develop one or more courses of action that are reasonably likely to lead to a better outcome for the company than the immediate appointment of a liquidator or administrator.The protection ceases if the director fails to actually implement one or more of the courses of action developed, when they cease implementing a course of action, when any such action ceases to be reasonably likely to lead to a better outcome or upon the appointment of a liquidator/administrator.
Safe harbour therefore does not protect you from personal guarantees you have given creditors if their debts go unpaid.
For the purposes of working out whether a course of action is reasonably likely to lead to a better outcome for the company, courts 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”.
Directors do not receive safe harbour protection if they incur debts at a time when:
- The company is not paying employee entitlements
- The company is not complying with its taxation obligations. The company must continue to lodge all tax returns and BAS’. If these tax debts go unpaid though, you WILL NOT lose safe harbour protection.
It is clear that if a director wants to rely on safe harbour protection they need to be doing everything in their power to attempt a genuine turnaround of their company. The best way to do this is by engaging suitably qualified and experienced turnaround professionals to assist with the turnaround process.