ASIC’s new safe harbour advice for directors ‘timely’: MinterEllison

Insolvency professionals say new guidance from the corporate regulator will give struggling businesses greater clarity about options amid record levels of insolvencies.

Insolvency professionals say fresh guidance issued by the Australian Securities & Investments Commissions will offer greater clarity around responsibilities for company directors amid record high levels of corporate collapses.

The updated guidance by the corporate regulator issued this month to directors and their professional advisers on the duty to prevent insolvent trading and around the safe harbour defence is seen as a timely move as high interest rates, cost pressures and dwindling liquidity fuel a perfect storm.

The new guide for directors follows a consultation process conducted with registered liquidators, professional bodies and other interested parties and replaces previous guidance issued in 2010 and reissued in 2020.

Analysis by multinational corporate law firm MinterEllison shows that ASIC has inserted extensive guidance on safe harbour protection, as well as adding factors on what it will consider when assessing whether a director may establish safe harbour protection.

It has also included additional practical examples to provide further assistance to directors and their professional advisers, and guidance around obtaining professional advice.

MinterEllison insolvency and restructuring partner Caitlin Murray said it was a significant shift in regulatory transparency, aimed at equipping directors with practical tools to navigate financial instability. However, she said it was a drop in the ocean of wider reform needed to address pressures facing businesses.

“It’s a timely intervention,” she said.

MinterEllison partner Caitlin Murray.

“What has ASIC has done is given their views for the first time on how they see safe harbour ­defence operating from the perspective of an enforcement action by them. It gives directors guidance and time on how to proceed down that path and the bare minimum expected.”

Safe harbour provisions enable directors to pursue restructuring or refinancing efforts in good faith without the immediate threat of insolvent trading claims. However, the guidance underscores the importance of prerequisites, such as maintaining up-to-date tax filings and employee entitlements – areas where smaller enterprises often falter.

Almost 26,000 businesses have plunged into insolvency since the 2022 federal election – including a record number last month.

ASIC data showed that the country has notched a record number of insolvencies in a calendar year, with 12,405 businesses collapsing between January and November 30.

While the guidance has been welcomed, MinterEllison said its practical use varied, as larger corporations, often equipped with the necessary infrastructure and expertise, had the most to benefit.

Small-to-medium enterprises faced unique challenges: a lack of awareness about safe harbour provisions and difficulties meeting eligibility requirements.

“SMEs often struggle to stay current on tax and employee obligations, which disqualifies them from safe harbour protections,” Ms Murray said.

“Additionally, many SME ­directors have personal guarantees in place, making them personally exposed regardless of safe harbour measures.”

Rex Airlines entered into voluntary administration in July. Picture: AFP

MinterEllison insolvency and restructuring partner Michael Hughes said increased education by ASIC would foster a better understanding of insolvency safe harbour frameworks, and raise awareness of alternative options to keep a business afloat.

“Most directors don’t want to put the company into administration. Their starting position is ‘what can I do to fix this situation?’,” Mr Hughes said.

“The more people who rely on safe harbour, the less likely it is that they go into administration.

“Some companies, though, will inevitably get to the end of their process. The plan hasn’t been successful, and the company goes into administration, but at least in a solvent way people have tried very hard to save the business.”

Revealing the deep pain felt by employers, ASIC statistics show that 6925 construction firms, 4012 hospitality businesses, 1706 retailers and 1329 manufacturers had become insolvent since June 2022.

A record 1442 businesses hit the wall last month, an increase of 62 per cent compared with ­November last year and 158 per cent compared with May 2022 levels.

Mr Hughes said that next year would be no easier than 2024, with insolvency rates likely to climb due to retailers and hospitality groups facing continued impacts from weak consumer spending seen throughout the past two years.

“Safe harbour will play a major role in the near future with high interest rates, cost pressures and probably reduced availability of cash, and we’ve got heightened uncertainty in global economies,” he said.

The firm has identified the not-for-profit sector as an emerging industry feeling the strain, with funding sources such as donations and memberships under pressure due to rising costs of living.

Broader reforms to Australia’s insolvency framework remained elusive, despite the Parliamentary Joint Committee’s 2022 report recommending comprehensive changes.

MinterEllison said such reform was now unlikely until after the federal election.