Navigating the impending financial Strait of Hormuz: key takeaways for directors

What you need to know

• Australia has a strict insolvent trading regime under the Corporations Act 2001 (Cth).
• Safe Harbour provides a statutory carve-out where directors pursue a credible restructuring plan.
• Directors must assess whether financial difficulties are short-term liquidity issues or endemic.
• There is good authority that directors may take time to evaluate and respond to financial distress.
• Proper governance, financial oversight and record-keeping are critical in mitigating liability risk.

What you need to do

• Ensure directors and boards properly inform themselves of the company’s financial position.
• Convene more regular board meetings to actively monitor the company's financial position.
• Ensure appropriate financial records are maintained – including advice sought and given.
• Obtain advice from suitably qualified advisers – particularly Safe Harbour advisers.
• Take active steps to prevent misconduct within the company.

It has been nearly 20 years since the Global Financial Crisis, and more than 35 years since the last true recession. Yet many of the same economic headwinds are re-emerging. For corporate Australia, that means liquidity and solvency issues are likely to become more common, and boards and directors need to be ready.

So, what are the critical matters which a company or a director facing such issues needs to know?

The first is that Australia has a very strict regime in relation to insolvent trading under the Corporations Act 2001 (Cth). Therefore, directors need to tread carefully when navigating financial distress.

However, some reassurance comes from the decision in Hall v Poolman, which states that in some cases a reasonable time must be allowed to a director to assess whether the company's difficulty is temporary and remediable or endemic and fatal.¹ Obviously, if problems are fatal, then an appointment should be made immediately, but generally there is at least some prospect of achieving a sensible and informal workout outside of the formal insolvency regime. That option, if available, must be explored by well-advised directors.

In that context, serious consideration should be given to Safe Harbour, which is a statutory carve-out to insolvent trading. In essence, Safe Harbour allows directors to pursue a credible restructuring plan without the immediate threat of personal liability. The message is simple: take time, take stock, and seek Safe Harbour protection if there is a sensible and viable way out.

For practical guidance, the best starting point is the TMA's best practice guidelines for navigating Safe Harbour (which our RSSG team at Ashurst helped to develop).

In addition, we have given insolvent trading advice to innumerable directors and boards. Without exception, our advice is to:

• ensure directors and boards properly inform themselves of the company’s financial position;
• convene more frequent board meetings to actively monitor the company's financial position;
• ensure appropriate financial records are maintained – including advice sought and given;
• obtain advice from suitably qualified advisers – particularly Safe Harbour advisers; and
• take active steps to prevent misconduct within the company.

If the above steps are taken, then you may well navigate your way out of your own financial Strait of Hormuz!