Safe harbour
Guiding directors through uncertainty with safe harbour
Safe harbour was introduced to reduce the stigma of business failure, protect directors acting responsibly to restructure outside formal insolvency, and encourage early intervention.
By providing a pathway to turnaround, safe harbour supports directors who are committed to preserving value and protecting stakeholders.
Safe harbour is a legal mechanism that provides company directors with a defence to insolvent trading claims.
Under Australian law, directors can be personally liable for debts incurred when a company cannot pay its obligations. Defending these claims is costly, stressful and a major distraction from what matters most – turning the business around.
What is safe harbour and why does it matter?
Safe harbour is a restructuring framework designed to give directors breathing space.
Insolvent trading laws are intended to protect the interest of creditors when a company is facing financial distress by making directors personally liable for any debts incurred when the company could pay its debts. In addition to the liability for debts incurred, defending an insolvent trading claim is costly, time consuming and stressful for directors.
The need to manage this potential liability can be a significant distraction for directors when they should be focusing on turning around the underlying business.
The safe harbour regime was introduced into Section 588G of the Corporations Act for the purpose of:
- reducing the stigma of failure;
- protecting honest and diligent directors whilst pursuing a restructuring outside of formal insolvency, and;
- encouraging early action by companies facing financial distress.
It works by protecting directors who develop and implement a turnaround plan that is reasonably likely to deliver a better outcome for creditors than immediate liquidation.
This means directors can act decisively without the immediate pressure of formal insolvency. Before relying on these protections, directors must confirm eligibility and maintain compliance throughout the process.
Who is eligible for safe harbour?
Section 588G contains strict criteria on eligibility to take advantage of safe harbour and the actions of directors during safe harbour process.
To qualify for safe harbour, Directors must meet specific eligibility criteria, which includes:
- Up to date employee entitlements – The company must have correctly paid employee entitlements on time for the prior 12 months.
- Up to date ATO Lodgements – The company must have lodged all necessary Australian Taxation Office (ATO) lodgements for the prior 12 months.
During the turnaround process, Directors must ensure they:
- seek advice from a qualified advisor who has the necessary expertise to guide the company through the turnaround process;
- be actively developing or implementing a plan that is likely to result in a better outcome than liquidation;
- adhere to good corporate governance practices, which include staying informed about the company’s financial position, taking steps to prevent misconduct, and maintaining appropriate financial records.
What does a safe harbour plan involve?
Our approach to safe harbour includes a three-step process:
- Assessment – confirm that the company meets the eligibility criteria for safe harbour. While it’s up to directors to conclude they are eligible, we review company records and provide a written report detailing the process we have undertaken, our findings and our view on whether you are eligible.
- Plan development – if required, we can work with company directors and management to develop a turnaround plan that, if successful, will demonstrates a better outcome for creditors. Alternatively, we can review the turnaround plan developed by the company to confirm whether we believe it is likely to provide a better outcome than an immediate liquidation.
- Ongoing monitoring – Conducting regular reviews to ensure the plan remains viable.
Why safe harbour matters for directors
The main advantage of safe harbour is to provide a defence to claims of insolvent trading and therefore reduce the risk of personal liability of the directors. If found guilty of insolvent trading, Directors can be personally liable for losses incurred by Creditors.
However, absent a judgement against them, defending an insolvent trading claim can be costly, time consuming and stressful for Directors. The existence of a safe harbour defence can provide a barrier to anyone looking to bring such an action.
How we help
As an Australian-founded and owned firm with deep local expertise, we guide directors through every stage of safe harbour:
- independent eligibility assessment;
- development and review of turnaround plans;
- ongoing monitoring and reporting to maintain compliance.
