Proceedings currently before the Federal Court highlight the importance of boards carefully managing how safe harbour engagements are structured. That dispute concerns the extent to which safe harbour advice is privileged exclusively in favour of directors, with the consequence that the liquidators ought not be able to see or use written advice against the directors in legal proceedings. Regardless of the outcome, the case provides a timely reminder that the way a safe harbour engagement is structured, managed and implemented can be as important to directors as the advice itself.

Safe harbour

The safe harbour enshrined in section 588GA of the Corporations Act 2001 (Cth) protects directors from insolvent trading liability where they pursue a course of action reasonably likely to lead to a better outcome for the company than immediate external administration.

If the company ultimately fails, the substance of privileged communications concerning safe harbour advice has the potential to be relevant in the context of any insolvent trading litigation. The advice may evidence the directors' knowledge of the company's financial position, the restructuring strategies under consideration and the assumptions which underpinned any financial modelling.

When safe harbour advice is given by lawyers it is frequently assumed to be protected by legal professional privilege. However, safe harbour engagements typically involve lawyers, restructuring advisers, company officers and management all working together to design and implement a turnaround plan. It is important to be clear and understand from the outset the extent to which these communications are privileged, who (the company and/or the directors) holds the privilege, and what practical steps need to be taken to preserve the requisite level of confidentiality and avoid arguments about waiver of privilege.

This article identifies five areas in which privilege may be at risk in safe harbour engagements, and outlines practical best practice measures to address risk.

1. Define who the lawyers are acting for clearly

A simple but fundamental question should be asked by legal and commercial advisors at the outset of every safe harbour engagement: who are you acting for?

The safe harbour defence belongs to directors. Yet the company might also have an interest in work directed towards improving its future viability and financial position, and where a company is or is approaching insolvency its interests are assessed having regard to those of its creditors.

That potential overlap can create difficulty if the legal and commercial retainers do not clearly identify who the client is, and who is entitled to rely upon the advice. Where advice is expressly provided to directors only, there is a stronger basis for arguing that a liquidator should not be entitled to see or use the advice (absent waiver). The position may be very different if the client is not identified and advice is, in practice, delivered to the directors and company jointly.

Suggested best practice:

• Directors should see and approve the terms of engagement of lawyers and safe harbour advisors, and understand whether they contemplate legal advice being given to and for the benefit of directors to the exclusion of the company.
• The retainer should name the client and state whether the advice is provided to the directors personally, to the company, or to both. Ambiguous language (such as "the group" or "the board") should be avoided.
• If the company is responsible for paying associated costs but is not intended to be the client, the terms of engagement should reflect that the company is a payor only (and not the client or beneficiary of the advice).
• Work for the company associated with the implementation of turnaround strategies (e.g. negotiation of key contracts, advice on redundancies etc) should occur under a separate engagement letter where it is performed for the company (which will often be the case).

2. Structure the safe harbour advisor's engagement with privilege in mind

Safe harbour engagements typically involve lawyers and financial advisors (specialist restructuring accountants). The lawyers advise on whether the safe harbour defence is available; the advisors assess and build the financial model supporting the better outcome assessment, monitor the safe harbour plan against the company's projected future cash flows and sometimes provide specialist assistance in the execution of the plan (e.g. assisting the company in negotiations with secured creditors or other stakeholders).

Legal advice is presumptively privileged, and the critical question is who holds the privilege and whether that privilege has been waived.

Communications with and work product of the non-legal safe harbour advisor are more difficult. Unless these communications were brought into existence for the dominant purpose of enabling a lawyer to provide legal advice, there is a risk that the safe harbour advisor's communications are characterised as unrelated to the provision of legal advice and not privileged, even where the advisor was formally retained by lawyers providing safe harbour advice.

The risk is heightened where financial or restructuring advisors perform multiple roles. A non-legal safe harbour adviser may provide technical analysis to inform the lawyer giving advice, while also assisting the company with broader commercial or operational matters (e.g. associated with implementing strategies reflected in a safe harbour plan). The terms of any safe harbour advisor's engagement should clearly delineate the two roles, and the substance of communications should consistently reflect that separation.

Suggested best practice:

• If advice is sought for the dominant purpose of enabling the lawyer to provide legal advice, the restructuring advisor should be engaged by the lawyer (not the company or directors directly). The engagement letter should state expressly that the work is obtained for the purpose of enabling the lawyer to provide safe harbour legal advice. Advice should be delivered to the lawyer.
• Safe harbour work should be kept strictly separate from other workstreams the advisor may be performing for the company. This separation should be reflected in letters of engagement, invoicing, practical day-to-day communications and document management.
• If the restructuring advisor needs to obtain information from employees to enable them to prepare analysis for lawyers, a communications protocol should be implemented to ensure everyone involved understands that these communications are confidential and for a privileged purpose (with the board members holding the privilege). These communications should also be carefully managed, recognising that there is a higher prospect that a court might find that the dominant purpose test is not satisfied in relation to communications with employees or that the factual circumstances involve waiver.

3. Protect the privilege

Establishing privilege alone is not enough. Privilege must also be maintained.

Safe harbour engagements frequently require significant input from company secretaries, general counsel, CFOs and other key management personnel who hold key financial and operational knowledge necessary to inform the preparation of a viable safe harbour plan, and to test and assist with its implementation.

It is important to ensure that anyone outside of the board who sees or participates in confidential communications understands the extent to which the communications are intended to be confidential and privileged.

Suggested best practice:

• Deal with confidentiality and privilege expressly and upfront (e.g. by a communications protocol that is shared with relevant personnel).
• Limit disclosure/circulation of privileged communications to individuals on a genuine 'need to know' basis. Distinguish between providing information to the advisers and workshopping a plan or strategy (which management may need to do), and receiving advice about the applicability/availability of safe harbour (which should be restricted to directors).
• Where practicable, have privileged communications sent directly to directors' personal email addresses (rather than using a company secretary or management as conduit). Material sent through company email systems or stored on company servers should be clearly and expressly marked as exclusively privileged in favour of directors.

4. Exercise caution in relation to what is included in board packs and minutes

Board papers and minutes are company records. Directors will often have a need to receive and discuss legal advice during board meetings. Where practicable, the content of legal advice given to directors in relation to safe harbour should not be recorded in minutes and board packs. Where it is necessary to include it, minutes and packs should expressly mark the relevant content as exclusively privileged in favour of directors.

Suggested best practice:

• Where practicable, exclude substantive safe harbour advice from board packs and company minutes. Record only the fact that advice was received and considered. To the extent practicable, exclude management during discussion of legal advice provided to the directors (as distinct from the company).
• Maintain any more detailed records in a separate, privileged document clearly marked as directors-only, outside the company minute book.
• Consider convening separate directors-only meetings to discuss safe harbour advice.

5. In the event of liquidation

Safe harbour is designed to encourage directors to pursue a better outcome for creditors where there is a risk of external administration. Where a company ultimately enters external administration, directors should expect administrators and/or liquidators to seek information from them (voluntarily or relying on statutory powers).

Suggested best practice:

Directors should seek legal advice before responding to requests for information and/or documents made by administrators or liquidators. Any decision to voluntarily provide a liquidator or administrator with copies of written safe harbour advice should be approached with caution.

Takeaway

Safe harbour advice is obtained to protect directors from future insolvent trading claims. Unless privilege is properly managed, the same material may later become a valuable source of evidence for the administrator or liquidator investigating those claims.

Issues presently before the Federal Court demonstrate that privilege disputes in safe harbour engagements are far from theoretical and privilege should never be assumed.