How early safe harbour protection can help SMEs and NFPs avoid insolvency

Safe harbour is one of the newer provisions of the Corporations Act that guides insolvency law. It was introduced in September 2017.

"Safe harbour is intended to provide directors with comfort that they’ll be protected from being personally liable for debts incurred at a time when the company may be insolvent or is likely to become insolvent."

Before safe harbour was introduced, it was believed that many directors be so risk averse that they would appoint an administrator thus preventing the opportunity of being able to turn the business around.  The idea of safe harbour is to give directors the chance to seek outside advice to help turn things around before insolvency, instead of prematurely appointing administrators.

When safe harbour was introduced, it wasn’t widely understood, both among directors and professional advisors. Many directors thought it was just for large listed companies. This was mainly because of a lack of education and awareness.

"There’s more understanding of safe harbour now. Directors from SMEs and NFPs are being advised to consider this additional layer of protection when their companies face financial difficulties.”

I’m seeing more NFPs face financial turmoil in the current economy. A lot of it comes down to the funding arrangements that are in place. For example, I’ve been appointed liquidator to a charity in the NFP space that promotes healthy eating for kids – they rely almost exclusively on government funding.

Their board of directors were aware of the deterioration in financial performance, but instead of seeking safe harbour protection, they appointed a liquidator straight away. Hindsight is a wonderful thing, but this is an example where safe harbour perhaps could have offered a more favourable outcome.
 

It’s not always as straightforward as being proactive instead of reactive. Different directors have different risk sensitivities and different views of how close their company is to insolvency.

"However, early intervention through safe harbour can lead to far better outcomes for the organisation. Even if it’s just to facilitate an orderly wind-down to maximise asset values and returns for all stakeholders.”
 

The first step is to appoint a safe harbour advisor, such as RSM. There’s no obligation to disclose a safe harbour appointment, as it is a private appointment made by the board.  We recommend that key stakeholders are informed of the restructuring plan so that their ongoing support is agreed.

"Once safe harbour protection is underway, the advisor works with the board to provide guidance, assist with planning, and document the strategy. They help you explore strategies such as recapitalisation, refinance, fundraising, implementing a sales strategy, or even considering a wind-down strategy."

The board retains control over the SME or the NFP and continues making decisions they believe are in the best interests of the organisation, its creditors, and its shareholders.”

I recently worked with an aged care NFP that had significant solvency issues. The directors were honorary directors, but they were still exposed to the same personal liability as any other director.

We worked for six months on a dual strategy that involved gaining additional funding from the government to buy time to explore other options. Ultimately, it required a meeting of members largely made up of the local community to change the constitution. That enabled another aged care operator to take over operations to improve financial performance.

It was a great outcome because the residents could continue receiving care, the employees could retain employment, and the board could exit their positions and the risk they faced.
 

“Seek advice at the earliest opportunity. As a director, make sure you stay informed about the financial performance of the organisation. Whenever you see red flags about profitability or solvency, seek advice as soon as possible. If you act quickly, safe harbour can open a whole world of options you might not have thought possible.”