Press Release: Companies failing to sail into ‘Safe Harbour’ to avoid insolvency

Published in the AFR on 3 September 2018 by Yolanda Redrup: ‘Start-ups not accessing director safe harbour bankruptcy laws'.

• New laws passed a year ago aiming to help companies and their directors trade through insolvency are yet to be embraced by business.

• Evidence that they’re not being taken up due to complexity, cost and confusion according to commercial disputes expert Gavin Stuart.

Laws aimed at allowing Company Directors to trade through insolvency are yet to be embraced by business according to Bartier Perry Commercial Disputes Partner Gavin Stuart.

“The ‘Safe Harbour’ legislation introduced 12 months ago was hailed as one of the biggest shake-ups in company restructuring and insolvency for years,” said Mr Stuart. “The reality is that we’re seeing a pretty empty harbour as we believe companies are struggling with the complexity, cost and confusion as to exactly how the legislation applies.”

Mr Stuart said the laws were enacted with a particular focus on supporting emerging start-up sector through encouraging investors to fund ventures that may be struggling even though their business idea may ultimately prove successful, and encouraging experienced Company Directors to come on board while minimising the personal liability they face for any business failure.

“The intent of the legislation has always been welcomed by the business community but it’s the practicalities that are likely blocking these smaller businesses using it,” said Mr Stuart.

“Firstly, for a smaller cash-strapped business heading towards collapse, advisory costs likely to be in the tens of thousands to set up a safe harbour plan and implement are often prohibitive. Also, there are pre-conditions to being in the safe harbour, such as compliance with ATO obligations, which could make ineligible a large number of companies that are looking to take advantage of the safe harbour.  This then can lead to an insolvent administration, effectively defeating the purpose of the legislation. A key issue though is that no one can tell you that you are in the Safe Harbour with any certainty. So, Company Directors who believe they’ve done the right thing may still find themselves personally liable if the business ultimately fails.”

Mr Stuart said he expected a medium to large private company could find the Safe Harbour provisions of benefit, as they were more likely to have the resources and motivation to undertake it. It is in this segment of the market that Mr Stuart said he is seeing activity with the Safe Harbour laws.

Passed into law in September 2017 the Safe Harbour laws allow directors to trade on when their company solvency is questionable. Once in the safe harbour they cannot be personally liable if the actions they take are reasonably likely “lead to a better outcome for the company” as compared to liquidation.

No formal record or register of companies who have sought to enter the Safe Harbour is available with the Senate expected to review the legislation in 12 months time.