The Safe Harbour reforms provide directors with protection from insolvent trading liability if the director “starts taking a course of action that is reasonably likely to lead to a better outcome for the company and its creditors”. The legislation is expected to encourage directors to keep control of their company, engage early with possible insolvency and take reasonable risks to facilitate the company’s recovery. A ‘better outcome’ is defined as an outcome that is better than the immediate appointment of an administrator or liquidator.
It’s important for directors to document all steps taken when seeking to rely on Safe Harbour provisions. It’s also important to understand that Safe Harbour does not affect continuous disclosure obligations. There’s no special treatment for companies in financial distress. However, according to new ASX guidance (Guidance Note 8, section 5.10), the fact that directors of an entity in financial difficulty are considering alternatives to administration is not likely to require disclosure, ‘unless it ceases to be confidential or a definitive course of action has been determined’, in which case, disclosure is required.
The Turnaround Management Association has published a ‘best practice guideline’ setting out the steps to take if considering Safe Harbour provisions.