No safe harbours in the Pacific

By John Ridgway

Having caught your eye with the catchy heading, don’t stop reading if you are involved in the management or directorship of any business in the Pacific.

Some recent insolvency events in the Pacific shine light on the potential exposure that management and directors face when continuing to operate a business that is or might be insolvent. The insolvency situation is arguably more challenging in the Pacific where there is little (if any) legislation which enables the development of a comprehensive strategic plan to turn things around, the stabilisation of the business and the sourcing and securing of financial support for that plan. And this is what I mean when I reference ‘safe harbours’, being a place that is legislatively created which encourages management and boards to get help earlier rather than later. Much of the legislation in the Pacific has a focus on “traditional” types of insolvency arrangements, being receivership (by instrument or court appointment) and liquidations (by resolution or court appointment) - and in some instances, interim protection can be afforded to a board to attempt to enter into a compromise with creditors, failing which liquidation follows.

Port Vila, Vanuatu

In Australia, safe harbour legislation was only introduced in 2017, so - regionally - it is relatively new.  The legislation gives directors options by buying them time to try to identify alternative solutions for the business. That is, the legislation provides directors with comfort as they try to steer the ship out of troubled waters, as it were. Without this legislation, directors can (in some circumstances) be made personally liable for certain debts (or components of them) due to trading whilst insolvent. The safe harbour starts when the directors start developing a course of action to seek a better outcome for the company, once the directors sense that the company may become insolvent.

Many Pacific jurisdictions have enacted new companies legislation over the course of the last 10 or so years; in many instances that was long overdue. As is the norm for the Pacific, none of that legislation is uniform; a myriad of consultants from multiple jurisdictions all pointing the legislative finger in generally the same direction, but without any accuracy.  A cursory glance at the companies legislation in a number of Pacific jurisdictions shows that there are indeed no safe harbours; those with legislation that provide interim protection prior to liquidation also fall short of what is needed. Yet again, the law needs to try to keep up with business - particularly as more and more businesses grow to be truly trans-Pacific enterprises. Perhaps it might be an opportunity to create one common amendment that can be adopted across a number of Pacific jurisdictions, giving directors greater protection and creditors and financiers greater certainty, and arguably a better opportunity for a palatable outcome in the circumstances.

Imagine that: regionalism - a good idea, or am I just harbouring a silly thought?