SAFE HARBOUR: PROTECTING DIRECTORS FROM INSOLVENT TRADING
Daniel Luckman - Associate Director | Sunshine Coast
When a company faces financial difficulty, directors must carefully weigh the need to turn around a company’s financial performance against the risk of being held personally liable for insolvent trading if the company is ultimately placed into Liquidation.
Fortunately, the Safe Harbour provisions under section 588GA of the Corporations Act 2001 (Cth) (Corporations Act), referred to below as Safe Harbour Protection, provide a framework that allows directors to pursue a genuine recovery plan while limiting their personal exposure for insolvent trading.
What is Safe Harbour Protection?
Safe Harbour Protection offers a pathway for directors to turnaround a company’s financial position without the immediate concern of being held personally liable for company debts under an insolvent trading claim.
To qualify, directors must:
a) Develop (and then implement) one or more courses of action that are “reasonably likely” to result in a better outcome than immediately entering into a formal insolvency process like Voluntary Administration or Liquidation;
b) Ensure the company pays all entitlements of its employees that are payable; and
c) Ensure all returns, notices, statements, applications or other documents are completed as required by taxation laws (for example Business Activity Statements, Income Tax Returns, etc).
These steps appear straightforward, but the critical question is: what practical actions must be taken to ensure a course of action is “reasonably likely” to result in a better outcome?
Whilst it is not yet well-established at law, the Corporations Act does prescribe some practical steps, which include:
• Staying informed about the company’s financial position;
• Taking steps to avoid misconduct by officers and employees of the company;
• Maintaining proper financial records for the company appropriate for its size and nature;
• Seeking advice from an appropriately qualified entity, such as an insolvency practitioner or turnaround specialist; and
• Developing and implementing a turnaround plan.
To rely on Safe Harbour Protection, it is considered best practice for a director to comply with all the steps outlined above. Importantly, where a company has multiple directors, each individual director must independently demonstrate they have met the requirements for Safe Harbour Protection. This is not a responsibility that can be delegated or fulfilled by a co-director on their behalf.
How Can Safe Harbour Protection Help?
Safe Harbour Protection can provide the breathing space needed to:
• Restructure operations or reduce costs.
• Renegotiate with creditors and suppliers.
• Secure new investment or finance.
• Maintain business continuity and protect jobs.
By allowing directors to pursue a practical turnaround, Safe Harbour Protection supports long-term business viability and can help preserve value for all stakeholders.
Consider the example of an independent aged care facility that was facing high staffing costs, lost revenue opportunities, staffing and human resourcing issues and had encountered trading losses that were not sustainable for some time. The company’s board consisted of volunteer directors who were not involved in day-to-day operations and were worried about the long-term viability of the company.
The Board believed there were opportunities for significant financial improvement, and that with the assistance of the executive management team, the company could return to a profit.
After seeking advice on Safe Harbour Protection, the directors:
• Engaged and continued to seek advice from professional advisors to assess the financial position of the company, who liaised with the executive management team to report to the Board on a regular basis;
• Developed and implemented a restructuring plan, which focused on reducing staffing costs, increasing revenue and improving operational efficiencies across the company’s business; and
• Obtained the advice and support of third-party advisors and industry experts to assess operational deficiencies and provide recommendations to improve the company’s financial position (along with support to implement the required changes).
After encountering years of financial and operational challenges, within months, the company’s performance improved significantly and returned to making a profit!
The directors avoided personal liability throughout this process and the company avoided Voluntary Administration or Liquidation. In addition, the directors and executive management team developed the necessary skills to monitor and manage any future financial pressures experienced by the company.
Timely Advice is the Key to Success
Safe Harbour Protection is a valuable tool for directors and companies facing financial difficulty, offering a chance to restructure and recover. It encourages an honest assessment of a company’s financial position (by appropriately qualified advisors), proactive decision-making, supports job preservation and helps maintain trust with stakeholders.
The key to success lies in taking early action, obtaining expert advice, and demonstrating a genuine commitment to implementing necessary change.
If you or your client are facing financial difficulty, we encourage you to reach out to your local SV Partners’ office and seek appropriate advice –obtaining Safe Harbour Protection and timely advice may be the best thing you ever do!
What happens to an individual’s superannuation if they become bankrupt can be a complex scenario depending on their individual circumstances.
Protection of a bankrupt’s interest in a fund
In broad terms an individual’s interest in a superannuation fund is protected following bankruptcy provided that interest is held in a regulated superannuation fund as defined by the Superannuation Industry (Supervision) Act 1993 (SISA), an approved deposit fund or an exempt public sector superannuation scheme. The fund must be a complying fund.
The protection extends to withdrawals from a superannuation fund post-bankruptcy, that are withdrawn as a lump sum. This is an important exemption as most assets acquired post-bankruptcy vest in the Trustee as after-acquired property. The protection is also afforded to assets purchased with those funds post-bankruptcy.
Withdrawals that are in the nature of a pension or income stream will form part of an individual’s income to be assessed on an annual basis through the period of the bankruptcy, in determining whether a bankrupt is required to make income contributions.
If a bankrupt has made withdrawals from a fund prior to bankruptcy and those funds remain in a bankrupt’s bank account at the time of bankruptcy, they are treated as an asset of the bankrupt estate and, subject to quantum, may be recovered by a Trustee.
The consequences of an interest in a
Self Managed Superannuation Fund (SMSF)
The situation becomes more complex when an individual’s interest is held as a beneficiary entitlement in a SMSF. In order to be a complying fund, the members of an SMSF must also be Trustees of the fund. In the event the Trustee is a corporate entity, the members must be directors of the fund. A consequence of bankruptcy is that a bankrupt is disqualified from being a director of a company, impacting a Corporate Trustee of an SMSF. SISA also prohibits a member who is bankrupt from being a Trustee of the fund. The consequence of the disqualification as Trustee is that the individual can no longer be a member.
SISA allows a period of 6 months from the date that a Trustee becomes disqualified to appoint an alternative Trustee and transfer the bankrupt’s interest in the fund to an alternative fund. If the bankrupt fails to take the necessary steps within 6 months the fund becomes non-complying. While technically a trustee may potentially take steps to take control of the bankrupt’s entitlement from the fund in the event of non-compliance, the process would involve an application to Court which is a costly exercise.
Many SME SMSFs do not have the asset value to justify such an application. Once an individual is released from bankruptcy any disqualification to act as Trustee of the SMSF is lifted.
Transfers to a superannuation fund to defeat creditors
Several years ago it was not unusual for a person facing possible bankruptcy to transfer funds to a complying superannuation fund in the knowledge that those funds would be protected. The Bankruptcy Act 1966 (Act) was changed to provide Trustees with the power to recover funds paid to a superannuation fund after 28 July 2006 in circumstances where those funds would otherwise have become property of the bankrupt estate and the main purpose was to prevent the transferred property from becoming property of the estate. A Trustee has powers under the Act to apply to the Official Receiver for a superannuation account-freezing notice, which while in place, prevents a bankrupt from accessing funds. The bankrupt has the ability to seek revocation of the notice.
Substantiating a claim that any transfer to a fund was an attempt to defeat creditors depends on the individual circumstances in each case but will largely depend on a Trustee being able to demonstrate that the pattern of payments into the fund changed significantly in the lead up to bankruptcy. The powers to claw back payments to a fund also cover payments from a third party to the fund in respect of payments for the benefit of the bankrupt.
Superannuation payments that form part of a Family Court settlement
Superannuation entitlements are often a significant issue in Family Court matters involving the division of assets between the parties. Transfers into a superannuation fund pursuant to a court order that provides for a payment split under Part VIIIB or VIIIC of the Family Law Act 1975 are protected.
Further Information
This article highlights the intricacies of dealing with superannuation in bankruptcy. We are happy to discuss the issues highlighted further if you have any questions in relation to this topic.
Hillary Orr - Consultant | Adelaide
WHAT HAPPENS WHEN A COMPANY GOES INTO LIQUIDATION IN AUSTRALIA?
Ben Prebble - Supervisor | Brisbane
When a Company goes into liquidation, a Liquidator is appointed to wind down the Company’s affairs and recover as many assets as possible to repay its debts. The Director’s powers to manage the company are suspended. Winding up a company can therefore have a major impact on its stakeholders.
In most cases, a company is liquidated if it’s experiencing serious financial difficulties. This often leads to situations where creditors, employees and other stakeholders only receive a fraction, or none of the money they are owed.
In this article, we discuss what happens when a company goes into liquidation in Australia, and how it affects the company’s core stakeholders.
1. Impact on the Business and Trade Partners
In most cases, the appointment of a Liquidator will result in the closure of the business however in some circumstances, a Liquidator does continue to trade the business for a limited period.
The impact of liquidation on a company’s trading partners depends on how the liquidation is being managed:
• If the Liquidator continues to trade the company while conducting their investigations, the company may still buy and sell goods and services during the appointment.
• If the Liquidator does not continue to trade the company, customers won’t receive unfulfilled orders for products and/ or services, and no further orders will be placed.
Suppliers must seek direction from the Liquidator of the company as to whether their supply is still required. The Director is not able to give instructions on behalf of the company once a Liquidator is appointed.
2. Impact on Company Stakeholders
Directors
Liquidation impacts directors in a number of ways. Some key examples are:
• Director’s powers are suspended. Once a Liquidator is appointed, the Director can no longer use their powers and act on behalf of the Company.
• Directors have a duty to support the Liquidator’s efforts. For example, the Liquidator will investigate the company’s affairs and may need the Director’s help to understand certain business decisions.
• Directors must provide books and records of the Company. This includes completion of a Report on Company Affairs and Property (ROCAP), and
providing all company records they have in their possession to the Liquidator.
• Directors may be subject to legal action by a Liquidator. For example, a Liquidator may pursue a Director for any debts they incurred whilst the company was trading insolvent.
Despite the liquidation, directors may be made personally liable for debts owing to the Australian Taxation Office (ATO) if they have been issued with a Director Penalty Notice (DPN), or for debts owing to certain trade creditors if they have signed personal guarantees.
Employees
An unfortunate reality of the liquidation process is that employees usually lose their jobs when a company is liquidated.
Employees are considered “priority creditors” for the purposes of liquidation. The employees of liquidated companies may be entitled to unpaid wages, superannuation, leave entitlements, pay in lieu of notice (PILN), and redundancy.
If the Liquidator does not recover enough money to pay all outstanding employee debts, employees may be able to claim the Fair Entitlements Guarantee (FEG). The FEG allows employees of liquidated companies to claim unpaid wages, leave, payment in lieu of notice, and redundancy pay up to a certain limit, and will advance these amounts to employees regardless of the assets recovered in the liquidation. In most cases, the ATO will claim for unpaid superannuation in place of employees, but these amounts will only be paid if sufficient assets are recovered by the Liquidator.
Shareholders
Company shareholders are treated as investors who have knowingly taken a risk by purchasing shares. Shareholders receive the lowest priority in the order of payments, so it’s uncommon for shareholders to receive a dividend when a company is liquidated.
3. Impact on Creditors
Creditors are people or entities that are owed money by a company. For example, customers are considered a company’s creditor if they:
• Have paid for a product or service that they have not received
• Have paid a deposit for a product or service
• Have a gift card, voucher or credit note from the company
Suppliers are considered creditors if:
• They have provided goods or services to a company, but have not been paid for
them
• Amounts owed pursuant to a contract are unpaid
Secured vs Unsecured Creditors
Secured and unsecured creditors have different entitlements:
• Secured creditors retain their normal right to repossess secured assets if the company is in breach of the relevant agreement.
Secured creditors can also ask the Liquidator to deal with the security, or surrender the security to the Liquidator and lodge a proof of debt as an unsecured creditor.
• Unsecured creditors do not hold a security interest, and must lodge their debt with the Liquidator to receive a dividend.
What to Do if You Are Owed Money
Creditors have the option of lodging the debt and potentially receiving a dividend as an unsecured creditor.
Lodging the Details of Your Debt
If you want to receive a dividend as a creditor, you must lodge the details of your debt or claim with the Liquidator, including supporting documentation to prove the debt owed.
Voting at Creditors’ Meetings
Lodging your debt with the Liquidator allows you to vote at creditors’ meetings, or on proposals put forward by the Liquidator.
During the liquidation process, the Liquidator may call creditors’ meetings or issue proposals to inform creditors about their progress and/or ask the creditors to vote on certain matters.
If you have lodged your debt with the Liquidator, you can:
• Attend creditors’ meetings
• Vote on matters
• Ask the Liquidator questions
• Share information about the company
This allows you to have your say in the liquidation and vote on matters that may affect your outcomes.
Alternative Options
As an alternative, customers may be able to ask their bank to reverse the transaction. Some financial institutions offer payment protection that can help you get your money back. Time limits apply, so contact your bank or financial institution as soon as possible.
RESTRUCTURING ANYONE? QUARTERLY TO MONTHLY GST REPORTING CHANGES
Victor Mackintosh - Senior Accountant | Brisbane
Understanding the shift to monthly reporting for non-compliant businesses
The Australian Taxation Office (ATO) is set to implement a significant change affecting small businesses with a history of non-compliance with respect to taxation obligations. Effective from 1 April 2025, the ATO will transition noncompliant businesses (that report their Goods and Services Tax (GST) on a quarterly basis) from quarterly to monthly GST reporting in accordance with section 27-15(1)(c) of the A New Tax System (Goods and Service Tax) Act 1999
The Commissioner of Taxation will likely consider the following examples demonstrate a history of non-compliance (at least):
• Non payment, or late payment, of statutory obligations;
• Non-lodgement or late lodgement of GST and Pay as You Go Withholding (PAYGW);
• Incorrect reporting of taxation obligations
Any businesses affected by the change will be notified by the ATO in writing.
The ATO’s decision is grounded in the belief that more frequent reporting can help businesses stay on top of their obligations and prevent the accumulation of unmanageable tax debts. By aligning reporting more closely with regular business processes, the ATO anticipates that businesses will maintain better financial records and improve overall compliance.
For small businesses already experiencing financial difficulties, it is prudent that affected businesses seek professional advice to explore available options.
How this Affects Business Owners
• The Good: For some businesses, more frequent reporting may assist with cash flow management by encouraging regular tracking of financial obligations and avoiding large quarterly tax liabilities.
• The Bad: Increased reporting frequency may result in additional compliance costs, including more frequent lodgement requirements and potential administrative burdens.
• The Ugly: For businesses already struggling with cash flow issues, the shift to monthly reporting could exacerbate financial difficulties by requiring earlier payment of GST, leaving less time to manage short-term cash flow constraints.
Safe Harbour Protections and Compliance Risks
For directors relying on safe harbour protections, ensuring compliance with taxation obligations is a critical factor in maintaining eligibility. A failure to meet monthly reporting requirements could undermine a director’s ability to demonstrate they took reasonable steps to improve the company’s financial position, potentially exposing them to personal liability. Directors should ensure they have appropriate governance structures in place to meet their reporting obligations and seek advice where necessary.
Director Penalty Notices (DPNs) and Increased Risks
A shift to monthly reporting may have implications for DPNs, particularly in relation to unpaid GST and PAYGW. Under the DPN regime, directors can be held personally liable for unpaid tax obligations if they fail to ensure compliance. Monthly reporting could accelerate the issuance of DPNs, reducing the timeframe for directors to rectify non-compliance before personal liability arises.
Increased Compliance Burden for Accountants
Accountants and tax agents may see an increased workload due to more frequent GST lodgements for affected clients. This change will likely necessitate greater engagement with clients, more frequent reconciliations, and
potentially higher compliance fees. Additionally, accountants may need to proactively advise clients on strategies to manage the transition, including improved record-keeping practices and cash flow forecasting.
Considerations for Insolvency Practitioners
When assessing whether a company has traded whilst insolvent, Liquidators will often consider a company’s compliance history relating to its taxation obligations (amongst other things).
Should a company be moved to monthly reporting by the ATO, a Liquidator may be able to evidence that such a change, in combination with multiple other factors, indicates a company was trading whilst insolvent.
Should a director receive such a notice, it may also serve as an indication that they were, or should have been, aware of the company’s financial position, which could be relevant in assessing their actions in relation to any potential insolvent trading claim raised by a Liquidator.
Impact on Small Business Restructuring Appointments
The transition to monthly reporting could influence small business restructuring appointments by serving as an early warning sign of financial distress. If a business is moved to monthly reporting, directors should consider whether the business is at risk of insolvency and seek professional restructuring advice. Early intervention through restructuring may provide a pathway to recovery and prevent further financial deterioration.
Next Steps for Affected Businesses
Businesses that receive this notice should consult their accountant to understand the implications and explore available options to manage their tax obligations effectively. Seeking professional advice early can help mitigate risks, improve compliance, and identify strategies to navigate potential financial challenges.
HAPPY 10TH ANNIVERSARY TO SV PARTNERS MACKAY
Congratulations to Frank and Anna in our Mackay office who celebrated their 10 year anniversary as part of the SV Partners Group.
The Mackay office’s dedication and hard work over the past decade have been invaluable, and Frank and Anna’s commitment to the community and their service to Central Queensland have been instrumental to the growth of SV Partners.
From all at SV Partners, thank you for your commitment and contributions!