As COVID-19 continues to have an unprecedented impact on businesses across Australia, it is likely the safe harbour regime will be utilised more than ever before. In this blog post we outline the protections offered by the regime and how it will complement the recently announced temporary insolvency reforms to offer a saving grace in such uncertain times.

A safe harbour applies from the time that directors, who suspect insolvency, start to develop and implement a course of action that is reasonably likely to lead to a better outcome for the corporation than immediate administration or liquidation. It also operates as an exception to the insolvent trading provisions of the Corporations Act 2001 (Cth), however under the Government’s recently announced temporary economic measures, personal liability for insolvency has been waived for six months.

Safe harbour rules require directors to take an active role in the restructure, while acting honestly and genuinely. They must also use up-to-date financial information to assess the likely outcome of a restructure and comply with obligations to pay employee entitlements when they fall due. Meeting all of the company’s taxation reporting obligations, while properly maintaining books and records is also a requirement.

Under safe harbour rules, directors must engage with key stakeholders to develop and implement the restructuring plan. Once it becomes clear that a corporation is not viable, the protection of safe harbour will cease. Protections are not absolute and will require extensive advice and planning as well as consultation with key stakeholders. Their object is to encourage a restructure if it is reasonably likely to lead to a better outcome for the corporation.

Safe harbour does not to protect against other breaches of the Corporations Act and a liquidator may well still be entitled to pursue a creditor for an unfair preference.

The Safe Harbour regime signals a significant change to the corporate insolvency and restructuring landscape in Australia. They seek to maximise the opportunity for preserving a going concern to assist with a corporate restructure in appropriate circumstances. The reforms present a useful step towards dispelling the long-held view that insolvent trading in Australia is focused on punitive outcomes rather than promoting entrepreneurship. Given the uncertainty posed by the rapidly evolving COVID-19 pandemic, the Safe Harbour regime complements the Government’s temporary economic measures to provide a lifeline for Australian businesses.

You can read more commentary on changes to corporate law in response to the evolving COVID-19 situation here.