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Many providers in the Not-for-Profit sector face financial distress and insolvency due to factors such as increased costs, reduced revenue and donations, cash flow issues, regulatory changes, and uncertainty.
For example, the Disability Royal Commission Final Report dated September 2023, and the Independent Review into the NDIS Final Report dated October 2023 highlights some of the significant challenges and risks that the NDIS sector faces.
In this article, we will explore how the safe harbour provisions can help Not-for-Profit organisations avoid insolvency and continue to operate in the best interests of their clients and stakeholders.
Key points
- Safe harbour encourages responsible and considered action by directors to achieve a better outcome for their organisation than external administration.
- Safe harbour affords directors with protection from personal liability.
- We assisted the directors of a regional community services provider which was in significant financial distress navigate safe harbour options – leading to a successful outcome that secured the long-term viability of the organisation.
What is safe harbour?
Safe harbour is a regime established under section 588GA of the Corporations Act 2001 that protects directors from personal liability for insolvent trading if they are pursuing a safe harbour course of action that is reasonably likely to lead to a better outcome than external administration.
Why is safe harbour helpful?
Safe harbour encourages responsible and considered action by directors to achieve a better outcome for their organisation than external administration, whilst under ‘safe harbour’ protection from personal liability.
By accessing safe harbour, Not-for-Profit organisations and their directors can benefit from:
- Protection from personal liability for insolvent trading, which can otherwise expose directors to civil penalties, compensation orders, and criminal charges;
- Flexibility and discretion for directors to implement a turnaround plan that is tailored to their organisation’s specific circumstances; and
- Continuity of service delivery to the organisation’s clients and participants.
How can your organisation access and apply safe harbour effectively?
Accessing and applying safe harbour requires careful planning, execution, and documentation. Safe harbour typically requires directors to:
- Identify the signs of financial distress and insolvency early, and taking prompt and proactive action to address them;
- Engage qualified professional legal and insolvency advisers who can assist with developing and implementing a turnaround plan that is reasonably likely to lead to a better outcome than liquidation or administration;
- Maintain proper books and records that document the course of action taken, the rationale behind it, and the progress and outcomes achieved; and
- Ensure their organisation complies with all legal and regulatory obligations, including paying employee entitlements and complying with tax obligations.
Case Study: Regional Community Services Provider
We recently assisted a regional community services provider with successfully implementing a safe harbour turnaround plan.
The provider faced numerous issues before they engaged us, including:
- depleted capital reserves and imminent insolvency;
- over-reliance on conditional and limited assistance from the Federal Government; and
- limited management and governance expertise, particularly given the regional setting of the provider; and
- limited financial resources to continue operating in a complex and highly regulated industry.
These issues were reflective of how stricter governance obligations and regulations, and cost pressures can have crippling effects on regional or smaller providers.
With our assistance, the directors of the provider were able to devise a strategy to merge with a large provider, and obtain sufficient support from its members and key stakeholders to approve this strategy.
This successful outcome has ensured the long term viability of the provider.
Key to the success of this strategy was the directors’ ability to promptly identify their organisation’s financial situation and the need to engage qualified advisors to assist with a safe harbour process.
Safe harbour ensured that the directors were, throughout the highly risky process of completing a merger, protected from personal liability for insolvent trading.
Do you need help with understanding safe harbour?
We understand that every organisation has its unique challenges, particularly in the current regulatory and financial climate.
If you are concerned about the financial sustainability of your organisation, feel free to reach out to us and we can discuss tailored safe harbour options to suit you.
