How the Safe Harbour Provision Can Help You to Turnaround a Business

In September of 2017 an amendment was made to the Australian Corporations Act of 2001. This new legislation was designed to assist businesses in restructuring or completing a successful turnaround during financially challenging times.

The amendment was referred to as a safe harbour provision, and offered protection to directors and entrepreneurs who sought to pursue strategies that could save a company. Thanks to this amendment, the once risky proposition of saving a business is now safer than ever.

What is the safe harbour provision?

Australia is home to some particularly strict insolvency laws which have served to make business turnarounds difficult in the past. Historically voluntary administrators were called in by directors in order to absolve them of the personal liabilities associated with trading while insolvent.

The 2017 provision created a ‘safe harbour’ from personal liability for directors who were in danger of business insolvency in Australia, provided they were undertaking a legitimate restructure of that company, outside of formal insolvency.

There are a number of boxes that must be ticked by a director in order to qualify for safe harbour protection, including:

• Taking a course of action that is reasonably likely to lead to a better outcome* for the company when compared to the immediate appointment of an administrator or liquidator.
• Closely monitoring the financial position of the business, paying entitlements to employees when due, keeping appropriate financial records, and keeping up with tax obligations.

It’s worth noting that ‘reasonably likely’ and ‘better outcome’ are somewhat ambiguous terms which would only be clarified when judicial interpretations were made and legal precedents set in regards to the legislation.

What does safe harbour mean for entrepreneurs?

Before this amendment, a decision to purchase and attempt to turn around a failing company was a decision to captain a sinking ship. The threat of personal liability looming large, entrepreneurs were dissuaded from even trying.

Things changed for the better for entrepreneurs in 2017. With a safe harbour to steer the ship into, they could go about fixing the leaks without the heavy weight of personal liability on their shoulders. They could take reasonable and responsible steps to not only save the company and its workers, but eventually turn it into a success.

The most expensive and risky part of building a successful business is the start-up phase. These new laws granted entrepreneurs the opportunity to skip it in a less risky way; to take on an established (if floundering) company and turn it around, while enjoying deserved personal and business protection for doing so.

The pros and cons of safe harbour rules

There are a number of direct and indirect benefits that have come with the safe harbour laws:

• Directors and entrepreneurs are less likely to put their companies into voluntary administration.
• Directors, their companies and their employees have greater opportunities to succeed.
• More companies are likely to be saved from insolvency in Australia.

But the safe harbour legislation isn’t without its detractors, who have pointed out some possible flaws:

• Directors being less risk-averse, and putting the company and its employees in greater danger than a voluntary administrator would (although this has yet to transpire.)
• The lack of precedent and definition in the legislation, leading to directors being hesitant to actually use safe harbour protections.

But after all of these considerations are made, as they were when the legislation passed through parliament, the perks of safe harbour protections far outweigh the pitfalls. And the minor cons cited here are less likely to be an issue the more the laws are used.

The safe harbour clause and business turnaround

The safe harbour provision is a boon for anyone looking for a new business opportunity. Where business turnarounds weren’t worth the risk in years gone by, this legislation allows entrepreneurs to take on the challenge, while exercising effective business risk management, without the crushing weight of personal liability on their shoulders.

Starting a business from scratch is difficult. Safe harbour protections offer an exciting opportunity to anyone who appreciates the perks of taking on and transforming an established organisation. While there’s no doubt that it’s a challenging task, the road to success is often shorter, clearer and less costly.

Are you excited by the idea of turning around a business?

The 2020 DG Institute Business Turnaround Summit offers entrepreneurs and directors all the tools they need to successfully take over and turn around a business, with minimum financial risk, and maximum opportunity for profit.