How To Find A ‘Safe Harbour’ When Creditors Are Circling?
What Is The ‘Safe Harbour’ Act
Section 588G of the Corporations Act 2001 deals with the director’s duty to prevent insolvent trading. In essence, a director that breaches this section can be held accountable and even personally liable for the debts incurred while trading whilst insolvent. It was intended to discourage fraud and phoenix companies, but a side-effect has been to discourage measure to save good companies that might have been saved.
By the new section 588GA, Privacy the Treasury Laws Amendment (2017) Enterprise Incentives No.2 Act 2017 (call it the ‘safe harbour act’) says that s588G(2) of the Corporations Act 2001 (the civil offence provision) does not apply if the director who suspects that the company is becoming insolvent develops and implements a “course of action” that is reasonably likely to lead to a ‘better outcome’ within a ‘reasonable period’. A ‘better outcome’ is defined as being better than appointing an administrator or liquidator.
However, like speeding fines, the director bears a reverse onus of proof and must be able to prove that:
- The director is kept ‘informed’ of the company’s position (perhaps by keeping detailed minutes describing the position?);
- The director keeps proper books of account and records available for inspection (a good accountant helps);
- there is no misconduct by any officers or employees of the company (dismiss them to save the company);
- the director is taking advice from qualified persons (a good accountant is required); and
- a plan (in writing for proof) is being implemented.
Requirments Of The ‘Safe Harbour’ Act
To make use of the ‘safe harbour’ the company cannot fail, within a period of 12 months, to:
- pay employee entitlements as they fall due; or
- properly file and give tax returns and similar documents as and when they fall due (it is the failure to file the paper, the tax return, that is the offence, not the failure to pay the tax as and when due).
The courts alone can give an exemption from these requirements for ‘exceptional circumstances’.
Keep in mind that two of the traditional tests for insolvency are:
- the inability to pay debts as and when due; and
- liabilities exceed the assets.
So, if you have reason to suspect that your company may become insolvent there might be an alternative to immediately placing the company in the hands of the administrators. If you can satisfy the new requirements and come up with a plan to save the company, you might be able to make use of the safe harbour provisions.
Want To Learn More?
Contact Michael today to find out more about how you can utilise the ‘safe harbour’ act.
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