Author
Grahame WardDirector & ASIC Registered Liquidator
What are the Safe Harbour provisions?
The Safe Harbour provisions under the Corporations Act 2001 provide protections to assist company directors from personal liability for insolvent trading. The provisions enable directors who suspect their company may be insolvent, to find an alternative course of action other than immediately opting for administration or liquidation.
History
In Australia, directors have a strict duty under section 588G of the Act to prevent insolvent trading by a company. A director can be held personally liable for debts incurred by a company while it is insolvent if at the time the debt was incurred, there were reasonable grounds to suspect that the company was insolvent. Directors who are found to be personally liable for the debt may also be banned from managing corporations in the future.
Before the introduction of Safe Harbour provisions, directors who sought to rescue their company risked breaching their duties as directors and risked becoming personally liable for company debts under the insolvent trading provisions if their plan of action failed. It left them with little option other than to appoint a liquidator or administrator.
Why the changes?
In 2018, changes were made to the Safe Harbour provisions, introducing two new protections for directors.
- Firstly, a Safe Harbour was established for directors who are in the process of creating a plan to address the financial difficulties of their company.
- Secondly, Safe Harbour was introduced for directors who sought to restructure a company outside of traditional administration and entered voluntary administration to manage their company’s financial issues.
The changes were made to create clarity and certainty for directors managing insolvent companies and to encourage them to take prompt action and restructure their companies during financial distress.
How can directors access Safe Harbour?
Safe Harbour will only protect Directors during a “reasonable period” from their discovering and considering the right course to take, to them implementing action. It’s a loose term, but the time period varies according to the size and complexity of the business.
To be eligible, directors must ensure:
- All employee entitlements and superannuation payments are current
- Tax reporting is up-to-date.
- Bookkeeping and appropriate financial records are up-to-date
- There are systems in place to deal with any identified misconduct by employees and office bearers of the company.
The Safe Harbour process
Safe Harbour commences when a director executes a strategy or reasonable course of action that they believe will result in a better outcome for the company. They must specify what the course of action is in writing, and the strategy should include:
- The company’s financial position/situation
- The expected outcome of the insolvency action
- Evidence of advice from a qualified safe harbour advisor about the proposed restructuring plan
- The measurements/benchmarks they consider the turnaround to be a success
Directors need to be aware that if their turnaround is unsuccessful and the company enters liquidation, they will not be protected from personal guarantee claims. For that reason, directors should consult with an appropriately qualified adviser as early as possible to ensure their strategy has the best chance of success.
What is considered a reasonable course of action?
Because every company and financial scenario is different, each is assessed on a case-by-case basis. Therefore, it is difficult to provide a hard and fast benchmark for what is considered reasonable. If a liquidator seeks to make a director personally liable for debts accrued while trading insolvent, the onus of proof will be on the liquidator to prove the director’s course of action was not reasonable.
When does Safe Harbour end?
Directors must continually monitor their chosen course of action and ensure it is tracking well. If at any point it becomes reasonably clear the action will not lead to a better outcome, the Safe Harbour protection will end, and directors should consider a formal insolvency path to protect themselves from exposure to personal liability.
According to the Corporations Act, directors will be protected by the Safe Harbour provisions unless, or up until the point at which:
- They fail to take the course(s) of action developed within a reasonable period.
- They cease implementing the course(s) of action.
- The course(s) of action ceases to be reasonably likely to lead to a better outcome for the company, or an administrator or liquidator of the company is appointed.
What are the debts protected by entering Safe Harbour?
The debts protected by the Safe Harbour provisions are those incurred in the ordinary course of the company’s business, and which the directors believe on reasonable grounds that the company will be able to pay when they become due.
Safe Harbour is not a guarantee that the debts will be paid - rather, it protects directors from personal liability as they try to navigate the company out of insolvent trading.
How Safe Harbour Will Impact ‘Ipso Facto’ Clauses
The Safe Harbour reforms changed Australian insolvency law by specifically targeting the use of ipso facto clauses, contractual terms that allow termination or modification if one party becomes insolvent.
Key Changes:
- Ipso facto clauses are now stayed (i.e. temporarily unenforceable) when a business enters:
- Voluntary administration
- Receivership
- A scheme of arrangement
- This stay includes automatic/self-executing clauses, not just those requiring action from the other party.
- The goal is to prevent contract terminations that undermine restructuring efforts or cause business failure.
- The stay only applies to contracts entered into after the legislation took effect in July 2018 (grandfathering provision).
- Parties can still terminate contracts for other valid reasons, like non-performance.
Future Implications:
- Creditors may implement closer monitoring of client performance to anticipate financial distress early.
- Businesses may choose to amend existing contracts rather than enter new ones to retain ipso facto protections.
Overall, the reform aims to shift the culture around business failure in Australia and align more closely with innovation-driven economies like the US.
Why should you engage an expert early?
In late 2021, an independent panel was appointed to review insolvent trading and Safe Harbour, and it found that while “a qualified expert” didn’t necessarily need to be a liquidator, ‘in most circumstances, the experience of either a registered liquidator with turnaround experience or a turnaround specialist with deep insolvency knowledge will be required to analyse the ‘better outcome’.
Safe Harbour is not an automatic lifeline. It reduces personal liability for directors trying to trade out of insolvency, but professional advice is key to understanding its benefits and addressing issues early.
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