COVID-19 and Utilising Safe Harbour Provisions:
Safe harbour provisions provide an exception to business directors from liability when trading as insolvent when the company is establishing a course of actions, such as a restructuring plan, that would result in an outcome better than entering liquidation or administration.
Considering the current uncertain climate that many business owners face due to the COVID-19 outbreak, there are substantial disruptions and event breakdowns in business operations. Failures in key supply chains, staff shortages and general economic uncertainty pose serious issues to business owners which cannot be satiated long-term by government stimulus.
Whilst a ‘business as usual’, ‘wait it out’ approach may work for some businesses, the reality for many businesses is that this will not be the case.
It is important to note however, that Safe Harbour provisions have complex criteria and qualifications that need to be met.
Using Safe Harbour when affected by COVID-19 and similar situations:
Why should you be proactive?
Safe Harbour provisions enable directors to be protected from liability outlined under s 588G of the Corporations Act, during their attempts to restructure the business. Generally, these provisions when combined with restructuring processes assist in critically governing of financially distressed companies.
Undertaking Safe Harbour provisions and restructuring efforts also enable directors to consider alternative, potentially more effective, business strategies to implement in order to build, maintain and protect long term viability.
How would implementing Safe Harbour provisions work?
Considering the complex requirements for these provisions to be used, directors should carefully consider whether they should implement them. If they believe exploring this avenue is the best option, seeking assistance from an advisor in insolvency is important to ensure your business meets the entry requirements under Corporations legislation. If your advisor has indicated the business is capable of meeting these entry requirements, then establishing a course of action which would lead to a better outcome than administration/liquidation is required (e.g. restructuring).
Benefits to Using Safe Harbour Provisions:
Establishing a restructuring plan:
- The aim of this plan is to rapidly assess the best position the company will be able to take. In doing this, it is required to ensure the company will meet the criteria for Safe Harbour provisions and ensure it meets the required criteria. Implementing a swift are structuring plan is important during this time.
- The main criteria to consider when establishing a restructuring plan are; liquidity, commitments, financial access and capital, assessment and future planning.
Establishing a restructuring plan with your business’ advisor is important to ensure the Safe Harbour provisions apply. These plans can include:
- Reducing product order amounts focusing on internal production. Streamlining procedures on production and general operations. This also will extend to re-considering distribution and shipping arrangements and potentially renegotiate terms with suppliers.
- Looking at Financial maintenance and preservation methods (such as withholding dividends). This may also extend to communicating with finance companies / financiers to discuss loans or repayments.
Safe Harbour going forward:
If Safe Harbour has been granted and your company is afforded the relevant protections from the legislation, what then?
- Ensuring the company is effectively utilising these protections, this includes acting swiftly to ensure that the standards will continue to be met. This extends to the whole duration of these provisions being in operation, as these Safe Harbour requirements must be met for the duration of the restructuring period otherwise the protections will not be afforded. As a result it is also important to ensure there are multiple different options available within this plan to ensure that the restructuring is flexible to the changing situations effecting the business. With the risks posed by Covid-19, it is important to be prepared to implement a host of different business strategies in order to wait out and sustain success through this pandemic.
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