The Corporations Act 2001 imposes a duty on directors to cease operating a company whenever their organisation could be considered insolvent.
Under such circumstances Directors and/or Owners may have to consider voluntary administration – or filing for bankruptcy in the worst case, rather than take the risk of continuing to trade.
Clearly such rules could not be fair in all cases and some protection was required. Consequently Australia’s Safe Harbour rules came into effect in 2017 with the intention of alleviating punitive action by providing relief for eligible businesses. There was a need to provide protection where a reasonable turnaround of a business was a probability, rather than possibly destroying the business with all the damage that failure entails.
The Safe Harbour protection secured in 2017 remains in place assisting turnaround activities considered viable. The protection ends when either the proposed recovery is successful or is proven to be ineffective. A negative decision usually ends with the appointment of an Administrator and the winding up of the organisation. A positive outcome has several ongoing conditions attached which must be met to help protect those Directors/ Owners who act honestly; such as:
- The business must continue to pay all of its employees entitlements
- The business must comply with its existing tax obligations
- The Directors / Owners must continue to act in the best interests of the company (as per Corporations Act 2001)
It is not unusual also for a business to enter into a Scheme of Arrangement with its creditors or be put into voluntary administration by its owners. These choices would be made depending upon circumstances where it was considered advantageous to do so and perhaps help to avoid immediate bankruptcy.
The current Safe Harbour rules were developed due to protests from small businesses that under prevailing tight economic conditions they needed relief in order to rebuild sustainability in their enterprises. If secured it would give them a second chance at creating better outcomes than destroying their businesses in times of financial hardship. It is fair to say this has proven to be the case for numbers of small businesses since the regulations came into force.
Need help? Contact Small Business Association of Australia on 1300 413 915 or email firstname.lastname@example.org
Written by Colin Coverdale, Chair Policy Small Business Association Australia.