When insolvency looks likely: do you need safe harbour?

Restructuring Insights

If you’re in touch with your company’s financial position and receive regular (if not daily) updates, you should be able to see the writing on the wall well before the situation becomes dire.

But how do you know when you’ve passed the point of 'not doing well' and entered 'insolvency' territory?

Here are a few of the common signs of impending insolvency:

  • the company can’t pay its bills on time
  • you’re not sure how it’s going to pay bills on timeDo you need safe harbour?
  • you’ve failed payment arrangements for tax
  • you’re getting constant calls from creditors
  • you’re frequently lending the company personal money
  • the bank has stopped giving you credit
  • the company is suffering continual losses

If you reach this point, it can be difficult to know what action to take.

Unfortunately, there is a tendency for directors to pretend that nothing has changed, or live in false hope that it will all go away. But the truth is that without acknowledging the situation and creating an effective plan for change, the chances of success significantly diminish.

As Benjamin Franklin so succinctly put it:

If you fail to plan, you are planning to fail.

How safe harbour can help

According to the Corporations Act 2001, you cannot continue trading if you are insolvent (unable to pay your debts).

However, the safe harbour provisions can enable you to continue trading if (and only if) you take certain actions.

Aside from ensuring that accounting, employee and tax obligations are up-to-date and maintained properly, you need to devise and document a reasonable restructuring plan with the help of a qualified restructuring adviser.  Your plan must be reasonably likely to provide a better return to creditors than the immediate liquidation of the company.

This plan is an opportunity to properly evaluate your company’s finances, and examine practical ways to lift it out of its current situation.

If you implement and comply with the restructuring plan, you may use this plan (and your other actions under the safe harbour provisions) as a defence if you are taken to court for trading while insolvent.

Why a restructuring plan is so important

Financial troubles are not easy for anyone, but when you’re a director and have employees to worry about, it can be particularly difficult.

High levels of anxiety and even depression can ensue, and you may make irrational decisions that end up causing more harm than good.

But imagine what it would feel like to stop, take a breath, and evaluate the situation with an experienced business adviser. Someone who could uncover where things might be going wrong, and offer suggestions on how to make it go right.

Your restructuring plan could include any number of strategies (depending on the nature of your business), and may even include a concrete plan for winding the company down. However, with a good plan in place, you can rest assured that you know what is happening – and can take each step with confidence instead of concern.

How to create a restructuring planDo you need safe harbour?

Given the provisions of safe harbour, you need to engage a restructuring specialist to help you create a sound restructuring plan.

This is where RSM can help. Our team of restructuring and recovery experts will work with you to understand your situation, offer objective advice, and put together a feasible plan.

You don’t need to face insolvency alone, and with the safe harbour provisions, it could be the second chance you’ve been seeking to revitalise your business and devise a brand new strategy that could ultimately lead to success.

For more information on safe harbour, please contact the Restructuring & Recovery specialists at your nearest RSM office.