TMA Australia’s Support of Safe Harbour

The TMA is supportive of the safe harbour protection from insolvent trading liability found in s 588GA of the Corporations Act 2001 (Cth) (the Corporations Act).

As outlined in the TMA’s 2021 submissions Safe Harbour submissions – TMA Australia (turnaround.org.au) to the Review of the Insolvent Trading Safe Harbour (the Review), drawing on our members’ considerable experience, the safe harbour works to avoid formal insolvency, and to improve outcomes where formal insolvency results.

The TMA wishes to clarify a number of matters arising from a recent ASX announcement and related commentary in relation to the safe harbour regime.

The ASX does not consider that invoking safe harbour is per se a matter required to be disclosed by a listed entity to the ASX: see 5.10 of ASX Guidance Note 8.

Safe harbour is not a formal status of a company, but rather refers to steps that a company’s directors can take to obtain protection against possible liability for insolvent trading (or creditor defeating dispositions).

However, as a practical matter safe harbour will typically arise in circumstances where a company may be undergoing some degree of financial stress, and addressing that financial stress may require the company to pursue transactions or take other significant actions.

Material adverse developments in relation to the financial condition of a company will generally need to be disclosed, and a company might also need to disclose what courses of action it is taking as part of any restructuring initiatives (which may form part of the directors’ safe harbour plan), in each case to the extent this amounts to market sensitive information and relevant exceptions do not apply, consistent with the ASX Listing Rules.  For example, a course of action being taken by the company may involve an incomplete proposal or negotiation that is confidential (and which a reasonable person would not expect to be disclosed), potentially giving rise to a disclosure exception. However, once the proposal or negotiation completes or ceases to be confidential disclosure may be required.

The Review cited the ASX Guidance and noted (at section 8.1(b)) that the prompt for continuous disclosure is the underlying circumstances that are leading to solvency concerns (or the fact of insolvency or likely insolvency itself). The Review also concluded (at section 14.3) that the safe harbour ought to be available to the directors of listed companies and noted (at section 14.2) that most stakeholders making submissions were adamant that confidentiality of a director relying on safe harbour should be maintained.

There may be circumstances where the ASX considers that there is or is likely to be a false market in an entity’s securities, in which case the ASX can require a company to provide information to correct or prevent that false market. Problems may arise if directors of listed companies are obliged to answer specific questions as to whether they are relying on safe harbour (as opposed to ensuring that the underlying financial distress of the company and any relevant transactions have been appropriately disclosed).  Whilst voluntary suspension may assist in some circumstances, the focus of disclosure should, in TMA’s view, be on the disclosure of issues that give rise to consideration of safe harbour, and any material actions or events that may flow from a safe harbour process, and not the disclosure of safe harbour itself.

Finally, the TMA notes (as a matter of clarification in light of recent commentary) that the Corporations Act does not require that directors obtain professional advice in order to formally invoke safe harbour protection; whether such advice has been obtained from an “appropriately qualified entity” is one of a number of matters to which “regard may be had” in determining whether a course or courses of action are reasonably likely to lead to a better outcome for the company (a core ingredient of the safe harbour protection): see s 588GA(2) of the Corporations Act. Whilst the TMA generally considers it is prudent that directors seeking to invoke safe harbour protection obtain appropriate advice, such advice is not (in itself) a mandatory safe harbour entry requirement. 

The TMA is not giving legal advice in this post, and recommends that legal advice should be obtained referrable to particular facts and circumstances.