Navigate your way to a Safe Harbour - Turnaround

1 Navigate your way to a safe Harbour TMA BEST PRACTICE GUIDELINES. 2 TMA BEST PRACTICE GUIDELINES. TMA BEST PRACTICE GUIDELINES. Based on AICD surveys, the personal liability The guidelines are based on current best risk in relation to insolvent trading is very practice for workouts. They have been drawn important to directors in times of financial from internationally accepted principles, distress. Recently, the Government has moved Australian case law, detailed consideration to soften the prospect of personal liability by of the new legislation and input from top tier introducing safe Harbour reforms. But it is all accounting, investment banks and law firms. very well and good knowing that there is a safe TMA members (there are over 700 members Harbour but how does a director Navigate it?)

2 In Australia alone and approx. 9,000. Financial distress is not something planned for international members) are available to guide or desired. It is the exception, not the rule. To a company through a safe Harbour whether ease that angst, the Turnaround Management individually or as part of a team. Go to the TMA. Association of Australia (TMA) has developed website Best Practice Guidelines for both directors and for more details. advisors in relation to navigating safe Harbour . We commend the guidelines to you. 4 TMA BEST PRACTICE GUIDELINES TMA BEST PRACTICE GUIDELINES 5. TMA BEST PRACTICE GUIDELINES - NAVIGATING safe Harbour . Starting to suspect Assessing and entering PHASE insolvency/risk of insolvency safe Harbour Planning course(s) of action Taking action Leaving safe Harbour PHASE Conduct initial assessment Assess availability of safe Harbour Develop and approve a Implement Turnaround plan and monitor Assess the success or failure of the course of OBJECTIVE of financial position and resolve to enter Turnaround plan performance regularly action taken Assess whether the company is solvent Directors form an initial view on Hold regular board meetings where whether the company is solvent or Engage appropriately qualified Enter into standstill arrangements with the course(s)

3 Of action are reviewed and has achieved long-term viability or entity/entities * key creditors (if required) whether a formal insolvency appointment at risk of insolvency and monitored against milestones or solvent wind down is required Assess threshold issues: is the company Company must manage key Directors seek legal, strategic and able to pay employee entitlements and Form a Turnaround committee of key stakeholders and maintain appropriate *Who is an appropriately financial advice, as appropriate stakeholders (if appropriate). comply with tax reporting obligations? financial records qualified entity ? The legislation does not specify who will constitute an appropriately qualified entity.

4 AVAILABLE The company avoids Urgently take steps to address any Implement crisis stabilisation and cash management processes Directors must continue to comply with all their general law and statutory In the TMA's view, the following qualifications should be held: STEPS incurring fresh debt officer/employee misconduct (if appropriate) duties, including financial monitoring expertise in the operational, management, financial and legal aspects of a restructuring;. tertiary qualifications (or their equivalent) in Formulate the Turnaround plan. Company must comply with continuous Turnaround ;. Directors document steps taken through Determine whether a standstill period Advisors provide a written disclosure obligations (if applicable) and board meetings, file notes and records can be agreed with financiers/ key demonstrable Turnaround / restructuring better outcome opinion on proposed continue to pay employee entitlements of advice creditors experience; and course(s) of action and satisfy tax reporting obligations compliance with the code of ethics and professional development requirements Advisors form a view on availability of Obtain stakeholder approval of the person's relevant accrediting Directors consider insurance position safe Harbour .

5 Of plan (if required). Change course(s) of action if necessary organisation. (if appropriate) Board passes a resolution to implement Pass board resolution approving the safe Harbour (if appropriate) plan (if appropriate) All Certified Turnaround Professional accredited members of the TMA meet these standards. The company may be best served by a 1. Formal restructuring plan 1. Regular board meeting minutes combination of professionals, including 1. D ocumented engagement of documented, including better which document continued registered liquidators, lawyers, accountants appropriately qualified entity outcome opinion consideration of plan and/or investment bankers. 2.

6 C onfirmation that threshold EVIDENCE 1. Documented assessment of financial status of company issues are satisfied 2. Documented stakeholder views (if appropriate). 2. Progress reports against milestones OUTPUTS by directors and advisors 3. F ormal recommendation on safe Harbour 3. Board resolution to implement the plan 3. Updated forecast financial models 4. B oard resolution to implement 4. Documented timetable and 4. Appropriate reporting to safe Harbour (if appropriate). responsibilities for execution stakeholders and market The Turnaround plan must be implemented within a reasonable period, having regard to the size and nature of the business. TIMING The above visual aid is not necessarily meant to represent a linear structure.

7 Disclaimer: this content is provided on an as is basis for general information purposes only and is not intended to constitute or substitute legal or other professional advice. You must make your own assessment of the information contained in this guide and rely on it wholly at your own risk. You should not take any actions based on this guide without seeking legal The process outlined in this guide should unfold as efficiently as possible. In this advice. To the extent permitted by applicable law, all representations, warranties and other terms are excluded. This guide is tailored to the considerations that may be relevant in the regard, it may be appropriate for some actions to occur contemporaneously.

8 Medium to large enterprise sector, and in particular for entities with a turnover of more than $10 million. Different considerations are likely to be more relevant to smaller enterprises. TMA BEST PRACTICE GUIDELINES. 6 TMA BEST PRACTICE GUIDELINES TMA BEST PRACTICE GUIDELINES 7. TMA BEST PRACTICE GUIDELINES - NAVIGATING safe Harbour . ASSESSMENT OF SOLVENCY RESOLVING TO ENTER Turnaround PLANNING IMPLEMENTATION AND LEAVING safe Harbour . The directors must undertake an initial assessment safe Harbour Once the board has resolved that safe Harbour is MONITORING Once the plan has been fully implemented (including of whether the company is insolvent or at risk of available, standstill arrangements with key lenders any necessary variations), the board should re-assess If the board has determined that the company is The Turnaround should be implemented within a becoming insolvent.

9 Time is of the essence in doing so. and other creditors may need to be pursued to the financial position of the company with the insolvent (or at risk of insolvency), it must now decide reasonable period and otherwise in accordance with give the company time to develop and implement a assistance of advisors. The test for determining whether a company is on whether safe Harbour is available or whether to its timetable. Turnaround plan. solvent is whether the company is able to meet its invoke a formal insolvency process, such as voluntary If the workout during the safe Harbour period has administration. A formal agreement may need to be entered into with debts as and when they fall due.

10 This is a cash flow If appropriate, crisis stabilisation, including aggressive been successful and long-term viability of the financiers to replace any standstill arrangements. test rather than a balance sheet test. cash management, should also begin immediately. company has been achieved, the company should If independent legal and financial advice has not Generally, management should strive to instil sense of work to institutionalise relevant improvements. Independent legal and financial advice are yet been sought by the company, such advisors Communication with financiers is usually critical in should now be formally engaged. The advice of urgency and performance-orientation in staff to effect recommended at this stage.