‘Safe Harbour’ protections may help Australian startups and scaleups ride out the current storm

Legal Briefing – By Paul Apáthy, Mark Clifton and Elizabeth Henderson (Herbert Smith Freehills).

With a tightening market for capital, the ‘safe harbour’ protections may be critical for Australian startups and scaleups who are unsure if they can raise more capital within their current cash runway or who need to raise through debt securities like convertible notes. Relying on ‘safe harbour’ shouldn’t be seen as an admission of failure or a point of no return, but as a means to better ride out the storm.

KEY TAKEAWAYS FOR DIRECTORS​

Directors of Australian startups and scaleups should closely monitor the company’s cash flow runway and burn rate with a mind on both the company’s capital raising timetable and on the test for solvency under the Corporations Act.

Directors also need to consider the rules on insolvent trading when looking at fundraising opportunities as well as in connection with normal trading activities; some common VC fundraising structures constitute ‘debt’ under the rules.

If not already, now is the time for directors and management of startups and scaleups to familiarise themselves with the rules on insolvent trading and the application of the ‘safe harbour’ exemption, including whether and when to take steps to seek that protection. In practice, the ‘safe harbour’ exception is more likely to be available (and the outcome more likely to be successful) when steps are taken early and the company and directors have made appropriate preparation to rely on it if required.

As a rough rule of thumb (noting that every company’s circumstances are different), directors may want to consider whether it is time to avail themselves of ‘safe harbour’ protection if the company’s cash runway is 6 months or less and, before that time, should aim to be familiar with the requirements and in a position to implement them if needed.

Key principles and concepts of these rules are outlined further below but as there is some complexity to the operation of the ‘safe harbour’ exception and specific requirements that must be met, directors who wish who to take the benefit of this exception should seek specific advice on its application.

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‘A ship in harbour is safe, but that’s not what ships are built for.’ For entrepreneurs, it’s a maxim to live by. Caution keeps you safe but static; embracing risk and uncertainty is what drives innovation and business creation. More