In Australia, directors can be held personally liable for debts incurred whilst a company is insolvent.
These harsh insolvent trading laws are driving directors to seek voluntary administration prematurely, even in circumstances where the company may have been viable longer term.
As of September 2017, new legislation was enacted which provides directors with a safe harbour from insolvent trading.
How safe harbour reforms can help:
- Protects business directors in case of insolvency.
- Allows directors to continue to operate an insolvent company in certain circumstances.
Safe harbour applies from the time that a director begins a course of action that is likely to lead to a better outcome for the company than a formal insolvency process.
The process of safe harbour includes the following steps:
- Suspect insolvency
- Assess availability of ‘safe harbour’
- Develop turnaround plan
- Advisors will provide their opinion on the ‘better outcome’
- Implement and monitor turnaround plan
- The timing may vary and can last anywhere between 3 months to 5 years depending on the size and complexity of the business.
- Leave safe harbour
In order to qualify for safe harbour, you need to be a director who is acting honestly and diligently and you must have provided employee entitlements and kept tax reporting obligations up to date. From there, entry is quite straightforward and there are only a few steps that are required to initiate the process.
The aim of safe harbour is to drive a change in the behaviour of directors to encourage restructuring rather than formal insolvency. Safe harbour is designed to help facilitate a business rescue, without the concern of exposure to personal liability.
If you would like to know more, contact your Ledge Finance Executive or simply click here to contact us and we will be happy to help.