Australia’s corporate insolvency regime has undergone significant reform with the passing of the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017(the Bill) through both houses of parliament.

One of the key elements of the reforms is the introduction of a “safe harbour” for company directors, operating as an exception to the civil insolvent trading provisions of section 588G(2) of the Corporations Act 2001 (Cth). The new regime will create a safe harbour for company directors from personal liability for insolvent trading if, once directors start to suspect a company may become or is insolvent, they start developing one or more courses of action that are reasonably likely to lead a better outcome for the company than placing it into liquidation or administration.

It is hoped the new regime will drive a cultural shift amongst boards by encouraging company directors to engage early with possible insolvency by investigating and developing turnaround or restructuring strategies with the benefit of the safe harbour provisions with a view to facilitating a company’s recovery, rather than being placing it prematurely into administration or liquidation.

For company directors to avail themselves of the safe harbour provisions, the restructure or turnaround strategy or strategies being developed must be reasonably likely to lead to a better outcome for the company than administration or liquidation would. No doubt this test will be the subject of judicial consideration in the future, however, the Bill already offers some guidance to directors in assessing whether a course of action is reasonably likely to lead to a better outcome, and by extension, whether the safe harbour regime may be engaged.

Whether a course of action is reasonably likely to lead to a better outcome

Section 588GA(2) of the Bill offers some guidance to directors by listing actions that may be considered when determining whether a course of action is reasonably likely to lead to a better outcome for the company. One consideration of particular interest is whether a director is “obtaining advice from an appropriately qualified entity who was given sufficient information to give appropriate advice” (section 588GA(2)(d)).

The appointment of one or more advisers to assist with business turnaround may allow company directors to satisfy themselves (and a Court at some later time) that the strategy they are developing is reasonably likely to lead to a better outcome for the company and that the safe harbour provisions are available to the directors. The Bill terms any such adviser an “appropriately qualified entity” but is silent as to what constitutes “appropriately qualified.”

The Turnaround Management Association of Australia (TMA) considers that question in its TMA Best Practice Guidelines – Navigating Safe Harbour, published on 16 June 2017, and consider that the following qualifications should be held an adviser:

• expertise in the operational management, financial and legal aspects of a restructuring;

• tertiary qualifications (or their equivalent) in turnaround;

• demonstrable turnaround/restructuring experience; and

• compliance with the code of ethics and professional development requirements of the person’s relevant accrediting organisation.

The TMA suggests that a team of advisers including professionals from legal, accounting, investment banking and insolvency backgrounds are likely to best serve company directors to develop a strategy for the company whilst in safe harbour.

Steps Toward Safe Harbour

Under the new regime it will be critical for directors to seek independent legal and financial advice as soon as the company suspects there may be a solvency issue, bearing in mind that the test is whether the company is able to meet its debts as and when they fall due.

It should be noted that safe harbour is not available if the company cannot meet employee entitlements or comply with tax reporting obligations. Consideration should also be given towards the likely response of creditors and other stakeholders and whether enforcement proceedings are imminent.

Should the conditions for safe harbour be met (on the advice of the board’s advisers), and the board has resolved to accept that advice, it can commence planning for turnaround.

Discussions should commence with key stakeholders such as bankers or lessors to negotiate standstill arrangements.

A turnaround plan should be developed that sets out the company’s available options and identifies the underlying steps that need to be taken and their intended outcomes with respect to each available option. The plan should consider both operational and strategic issues and their financial consequences for the company.

The plan must also address the issue of whether turnaround is a better option than proceeding immediately to the appointment of an administrator or liquidator. The board should formally adopt the plan before proceeding.

Once the turnaround plan is adopted, directors should ensure that it is carried out both efficiently and effectively. Oversight of the implementation and performance of the plan is critical, both internally by management and the directors and also externally by the turnaround advisors.

The plan should be adjusted as circumstances require, always bearing in mind the “better outcome” test. If the board is no longer confident that turnaround remains the better route or that the conditions for safe harbour can no longer be met, it must examine voluntary administration or liquidation.

Smooth Sailing – the route to Safe Harbour

1. Solvency test – can the company meet its debts as and when they fall due?

2. Independent legal and financial advice should be sought.

3. Consider if it is necessary to make disclosures and notifications under any director and officer insurance policies and avoid incurring new debts

4. Can safe harbour conditions be met?

5. Develop a turnaround plan. Assess viability of turnaround in comparison to liquidation/administration using the ‘better outcome’ test.

6. Sound out key stakeholders such as bankers regarding standstill arrangements.

7. Implement the turnaround plan and formalise standstill arrangements with stakeholders.

8. Continue to assess the company’s financial position and whether turnaround has been achieved or whether formal insolvency processes should be engaged.