Insolvent Trading – Business Turnaround & Recovery

The company has received advice from an appropriately qualified professional who is able to form a view that enacting safe harbour will result in a better outcome for the company than liquidation or voluntary administration:

• A turnaround practitioner, who is qualified and has extensive experience in operational and financial turnaround is well placed to provide this advice.
• A turnaround plan should be developed where one or more courses of action are reasonably likely to produce a better outcome.

• The company should be fully compliant with its tax reporting obligations (not necessarily paid);
• Be able to pay employee entitlements;
• Continue to maintain appropriate books and records.

Safe harbour protection is available from the point in time when the directors start developing one or more courses of action. There is no specified duration to safe harbour protection provided the company continues to work towards an outcome that was reasonably likely to provide a better outcome than formal insolvency. The turnaround plan and initiatives may change and develop over the course of safe harbour protection.

Our insolvent trading lawyers recommend meeting monthly to: 

• confirm that the turnaround plan is being implemented;
• revisit the plan to test that it is still valid to achieve a better outcome;
• confirm statutory reporting obligations are being maintained; and
• ensure appropriate records are being maintained.

Directors can seek help as soon as the financial position of the company begins to deteriorate. It is important for advisors such as book-keepers and accountants to communicate with directors if they become aware of any circumstances that may warrant safe harbour protection such as:

• Declining earnings or sales;
• Difficulty in meeting outstanding tax obligations;
• Tight cash flow & inability to pay wages;
• An expectation that the next big job/sale/contract will save the company;
• Pressure from creditors & legal demands;
• Breach of lending covenants;
• External factors, market changes & increas/ed competition or disruption.

To be confident Safe Harbour protection continues to apply:

1. document the engagement of an appropriately qualified turnaround practitioner;
2. confirm the threshold conditions are being satisfied;
3. receive formal recommendations on Safe Harbour process; and
4. ensure directors continue to resolve at meetings that Safe Harbour purpose is being progressed and remains appropriate.

The answer to this very important question depends on the method of ‘turnaround’. There are two possible scenarios with varying levels of control:

1. Informal Workout or ‘Safe Harbour’ Turnaround

• In this scenario, you retain full control of your company during and work with a qualified turnaround practitioner.

2. Voluntary Administration or Liquidation

• In this scenario, a registered liquidator will take over control of your company. This is a person appointed by shareholders, or unsecured creditors. On appointment, the liquidator assumes control of the business, collects and auctions off its free (un-pledged) assets in a reasonably short time, pays the unsecured creditors from the proceeds of the sale, and (if any money is left) distributes it among the shareholders in proportion to their shareholdings.

The Australian Institute of Company Directors had long advocated for the legislative reform which is designed to encourage innovation, risk and sustainable economical growth.

The Turnaround Management Association (Australia), also strong advocates of the legislative reform, published Best Practice Guidelines – Navigating Safe Harbour. In July 2017, whilst still in consultation, Lachlan Edwards, the President of the Turnaround Management Association, and Marcus Derwin, Director, were interviewed for an article which appears in the July edition of the Australian Institute of Company Directors Magazine on the proposed Safe Harbour reforms to Australian insolvency laws.