Traditionally, Australia has had some of the most draconian insolvency laws in the world.
Rather than encouraging struggling companies to seek help before they fail, the laws focused on punishment of business failure and in many cases, sought to hold directors financially liable for the company’s demise, even in situations where the directors made genuine attempts to save the business.
While the desire to punish directors who do the wrong thing is understandable, the laws often resulted in well-intentioned directors prematurely entering voluntary administration, rather than actively try to resolve their company’s issues.
In addition to its poor record of saving companies, the insolvency regime has had even worse results for creditors. According to ASIC, unsecured creditors received no return on their debts in 92% of corporate liquidations in the 2017 financial year. This is hardly an ideal outcome from insolvency practitioners whose role is ostensibly to act in creditors’ best interests.
In fact, the AICD Chairman, Elizabeth Proust AO FAICD noted last year that:
“This focus on pushing companies towards administration does untold economic damage. How much value and how many jobs could be saved if the law allowed conscientious directors to undertake reasonable measures to save a business, rather than going into administration or liquidation? What major corporate collapses could have been prevented, avoiding devastating job losses and value diminution if directors had the option of pursuing a restructure or workout?”
Mawson has shared this view for a long time. While insolvency is inevitable for some companies, we believe that there have been many viable businesses driven to insolvency by this regime - businesses that could have been turned around (to the benefit of customers, creditors, employees and directors) if they had the chance.
For this reason, we were pleased to see the Federal Government introduce the new ‘Safe Harbour’ regime in September 2017.
This new regime is a meaningful shift in the way that regulators view corporate restructuring.
For the first time, the director of a business in financial distress may not need to run to the administrator’s ‘exit door’ for fear of personal liability. Instead, you can now obtain the protection to restructure and/or turnaround your business and, in doing so, protect your investment and that of your many stakeholders.
There are two important points to understand about this Safe Harbour protection.
This is not the end of insolvent trading laws, which still remain. The significant change is that personal liability can be mitigated providing you “take a course of action that is reasonably likely to lead to a better outcome for the company and the company’s creditors as a whole”. As Carl Gunther of KPMG recently said, this is “effectively a licence to be insolvent, but only whilst in the harbour”.
It is a requirement that you engage an ‘appropriately qualified’ adviser, such as Mawson, to help you develop and implement any restructure plan. The reality is that turning around a distressed business is difficult, which is why this requirement for external expertise has been mandated.
What should I do?
If your business is experiencing challenges with profitability, cash flow or debts, it is critical that you take the following steps immediately.
Seek advice from an appropriately qualified adviser, such as an accountant or adviser with specialist restructuring capabilities. If we can help, Mawson has long track record of successful business restructures and turnarounds and is deemed a “qualified adviser” by the legislation.
Develop a strategy that is “reasonably likely” to lead to a better outcome than the immediate appointment of an administrator or liquidator. In this regard, it is important to note that Safe Harbour protection can commence as soon as you start developing a strategy.
Continue to ensure that all employee entitlements (including superannuation) and taxation obligations are maintained.
Conclusion: prevention is still better than a cure
This new Safe Harbour regime is a significant step forward for both Australia’s directors and the many people they support. If used correctly, these laws will help encourage business owners and directors to make the right decisions without fear of personal liability.
Nevertheless, dealing with potential problems early is still a far better way forward. If you are concerned that your business is showing early warning signs, seek help as quickly as you can.
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