Key points

1. Financial sustainability is a critical issue for charities and not-for-profits. Directors will be protected from civil (and potential criminal) liability for trading whilst insolvent if a company takes advantage of a “safe harbour protection”. 
2. Regulatory Guide 217 (“Duty to prevent insolvent trading: Guide for directors”). With the benefit of this updated version of RG217, your charitable company can gain an enhanced understanding as to the safe harbour protection available to your directors, as a possible alternative to going into voluntary administration or liquidation.
3. A charitable company that is concerned about (and wants to improve) its financial sustainability should, in a timely manner, monitor and examine its finances, seek professional advice, and maintain written records of relevant decisions and actions. 

Charity solvency: a critical issue

2025 is shaping up as being the most challenging financial year for charities and not-for-profits. The challenges include: 

• Fixed and reducing government funding;
• Reduced philanthropy;
• Increased regulation from regulators, including ASIC, the ACNC, the ATO, education regulators, and the various aged care and disability services Commissions;
• Managing the whirlwind of artificial intelligence;
• Navigating the pathway through new Fair Work penalties for ‘wage theft’;
• Significantly increased penalties for Privacy Act breaches;
• Increasing wage demands to meet cost of living pressures; and 
• Increased activism from the ATO with the issuing of director penalty notices.

So what to do? Financial sustainability raises the urgent need to consider your options, including:

• mergers and acquisitions;
• sales of assets that are not core to your business;
• possible acquisitions that may enhance a commercial aspect to your business that is performing well;
• your major contracts and renegotiating uncommercial terms; and
• the extent to which you may be able to use AI to better improve your efficiency.

So what to do? Don’t panic! Don’t think that you must go into voluntary administration or liquidation. Rather, assess and carefully consider if any alternative options are available to you.

One alternative option is known as a “safe harbour” protection. If a company is aware of, or otherwise suspects its potential insolvency, and it starts developing one or more courses of action that are reasonably likely to lead to a better outcome for the company than the immediate appointment of an administrator or a liquidator, directors will be able to seek protection from civil (and potential criminal) liability for trading whilst insolvent. 

Updated version of RG217 – Duty to prevent insolvent trading: Guide for Directors

On 6 December 2024, ASIC released an updated guide for directors as to their duty to prevent insolvent trading –  Regulatory Guide 217 (RG217).

With the benefit of this updated version of RG217, your charitable company’s directors are able to access a practical guide as to what is ‘safe harbour protection’.

The key changes that the updated ASIC Guide for Directors has introduced include:

• Practical examples of the safe harbour protection: The Guide includes the following examples to help directors and their professional advisers understand the safe harbour protection – such as:
  • Maintaining up to date tax lodgements and payment of employee entitlements (this is a statutory requirement);
  • Timeliness of any asset sale program;
  • Up to date financial forecasts;
  • Requiring directors to resign if they are not prepared to agree not to incur further debts; and
  • Continuous assessment of a safe harbour turnaround plan to ensure a better outcome.
• Professional advice: The Guide encourages directors to seek advice from professional advisers (e.g. from registered liquidators, lawyers, and / or accountants), to make informed decisions. Further guidance is given as to how directors should seek advice from professional advisers;
• Holding company responsibility: The Guide explains when a holding company might be responsible for insolvent trading by a subsidiary; and
• Indicators of potential insolvency: The Guide also expands its Appendix of factors to take into account when considering whether a company is insolvent.

Takeaways

A charitable company that is concerned about (and wants to improve) its financial sustainability should consider implementing, in a timely manner, the following steps:

• Monitoring and examining finances: A charitable company (and its directors) should actively monitor and examine the company’s finance;
• Seek professional advice: Where necessary, a charitable company should seek appropriate professional advice from one or more advisers (e.g. from registered liquidators, lawyers, and / or accountants) about the company’s financial position and about steps the company can take to address any financial viability concerns; and
• Record-keeping: A charitable company should keep written records of decisions and actions taken to mitigate and remedy concerns about financial sustainability.

ASIC, as the regulator of companies, undertakes litigation against directors for breach of directors’ duty to prevent trading whilst insolvent.

Accordingly, it is critical that directors have regard to the updated regulatory Guide. In doing so, directors are given assistance with a better understanding of the option of entering into safe harbour when confronting the risk of insolvent trading liability.

Please contact us if you wish to discuss any of the issues raised in this update.