What is the Safe Harbour?

What is the Safe Harbour?The safe harbour is relief from the reckless trading provisions of the Companies Act 1993 (the Act).  Under the Act it is a breach of a director’s duties to agree to or cause the business of the company to be carried out in a manner likely to create a substantial risk of serious loss to the company’s creditors (section 135).  Further a director must not allow a company to incur an obligation without having reasonable grounds for believing that the company will be able to perform that obligation when it is required to (section 136).

The safe harbour proposals, however, provide that a director’s decision to keep on trading, including taking on new obligations, over the next six months will not result in a breach of duty if the following applies:

1. in the good faith opinion of the directors, the company is facing or is likely to face significant liquidity problems in the next 6 months as a result of the impact of the COVID-19 pandemic on them or their creditors;
2. the company was able to pay its debts as they fell due on 31 December 2019; and
3. the directors consider in good faith that it is more likely than not that the company will be able to pay its debts as they fall due within 18 months (for example, because trading conditions are likely to improve or they are likely to able to reach an accommodation with their creditors).

The safe harbour will apply from 3 April 2020.  It is also important for directors to note that the obligations to act in good faith and in the best interests of the company remain enforceable.

The importance of documentation to the Safe Harbour

We consider that it will be very important for directors to document their reasoning behind their “good faith” opinions at an early stage.   In particular, their reasoning for believing that a company will be solvent in 18 months should be carefully laid out so that if you are asked to justify your position at a later date, you will be well placed to do so.

Furthermore, directors will need to carefully assess whether the company did meet the solvency requirement as at 31 December 2020.  Companies that were insolvent at that date but, say had improved their position by 1 February, would not, on the strict wording, appear to be eligible for the “safe harbour”.  If you fall into this latter category, or if directors are uncertain about their company’s eligibility, we recommend that you contact us for further legal advice as to whether or not you will be able to rely on the safe harbour.

The government will be introducing legislation to make the changes to the Companies Act 1993 and we expect that these will be implemented shortly.  We will advise of further details as they are announced.

If you have any queries about how the relief package might assist you, or concerns about the impact of COVID-19 on the operation of your business, contact us for further expert advice.

This article is current as at the date of publication and is only intended to provide general comments about the law. Harkness Henry accepts no responsibility for reliance by any person or organisation on the content of the article. Please contact the author of the article if you require specific advice about how the law applies to you.