Since the safe harbour legislation was introduced in 2017, there have been no court cases dealing with whether a safe harbour process has been properly conducted or not. This can make it difficult for businesses and theirs advisers to know whether they are properly protecting a director from insolvent trading when applying the safe harbour regime.
As such, this article sets out some of the experiences that we believe makes a successful safe harbour process.
What is safe harbour?
In simple terms, safe harbour is the process which allows a director to implement a restructuring plan whilst providing protection against personal liability from insolvent trading if the attempted restructure ultimately fails.
When does a company consider using the safe harbour process?
Directors may consider utilising the safe harbour regime when their company is experiencing financial performance issues or financial distress, when their company has been impacted by an event that is likely to lead to financial performance issues or financial distress in the future, or finally, if they have concerns that their company may already be trading whilst insolvent (however the protection cannot be applied retrospectively).
The safe harbour process is not a public process as there is no requirement to formally notify any of the relevant authorities of such an appointment. This is distinct from other formal insolvency options such as liquidation and voluntary administration.
Eligibility Criteria
The first stage of the safe harbour process is to consider whether the eligibility criteria has been met, which includes the following:
- The company must have had substantial compliance in the last 12 months and have had all their tax lodgements up to date
- Employee entitlements must be up to date and have been substantially compliant in the 12 months prior to commencing the safe harbour process, and
- Maintain adequate books and records
Restructuring Plan
Assuming the business qualifies for the process, the next stage of the process is to develop a restructuring plan and undertake an assessment as to whether the proposed restructure plan to improve the performance of the business will be a better outcome than that of a liquidation.
This is where a suitably qualified advisor undertakes a review and prepares a formal report that outlines that comparison. The suitably qualified advisor must be able to look and assess the restructure plan to see if steps and goals in that plan are reasonable and achievable.
There is also an ongoing requirement during safe harbour to continually review the restructure plan and ensure that the option to liquidation does not become the better outcome. For example, if the forecasts are not met and those forecasts were relied upon to undertake the better outcome assessment, then the company must determine if the better outcome for creditors has changed to immediate liquidation.
Our experience
At Cathro & Partners we have undertaken several safe harbour engagements with businesses and a variety of experiences and outcomes have occurred. Those engagements that have been successful through the safe harbour process have achieved its objective of restructuring a business back into financial health through undertaking difficult and effective changes.
In undertaking these engagements, we have witnessed various changes resulting in a successful restructure. There have been some common experiences taken that have allowed for the desired outcome.
Examples of successful initiatives undertaken under safe harbour
Whilst the better outcome assessment is being undertaken, the business continues its restructure.
Some effective examples of steps taken by senior management and/or the board include:
- Regular meetings by the board on a weekly or bi-weekly basis, documenting the outcomes and undertaking the necessary restructure steps to rectify the issues that are creating the financial performance issues.
- Changes early in the process to senior management and even at board level where it has been identified that there are underperforming management or directors. It has been, remarkable to witness as the safe harbour advisor, that when those underperforming people are removed the restructure process becomes much more effective.
- Accurate or realistic accounting forecasts and weekly or daily cashflow models which enable the board to accurately reflect and review actual performance to the revised forecast and then be able to quickly pivot. For those businesses where the safe harbour process has not been as successful, we have commonly seen actual performance be very different to the forecast that was provided at the commencement of the safe harbour process. It is in this situation that immediate liquidation may become the better option.
Strong negotiation and commercials skills
Another critical element to the process is ensuring the key personnel undertaking the restructure have strong commercial and negotiation skills when dealing with the key stakeholders of the business such as customers and key suppliers. These customers and key suppliers of a business are always key to ensuring that the business continues as a going concern and that the discussions are upfront and transparent throughout the process to those stakeholders that are essential to the business.
Documentation and diligence
Finally, the board meetings will often include the safe harbour advisor, the legal advisor and should be combined with well documented minutes.
As outlined above, the key purpose of enter safe harbour is to protect the directors from an insolvent trading claim by liquidator should the restructure fail, and the company be wound up. The documentation of the process undertaken is then provided to the liquidator to demonstrate that the directors have a valid defence to insolvent trading.
It is evident to us that those that succeed in undertaking the safe harbour process are also very diligent in their disciplines and processes throughout the restructure process.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.