Understanding safe harbour

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Overview of Safe Harbour

Safe harbour is a legal mechanism that provides company directors with a defence to insolvent trading claims.

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 have developed and are pursuing a turnaround plan that is likely to provide creditors with a better financial outcome than an immediate liquidation. Before relying on these protections, directors must ensure there company is eligible and they are meeting the ongoing requirements during the turnaround process.

Eligibility criteria

To qualify for safe harbour, Directors must meet specific eligibility criteria, including:

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.

How we can help

At KordaMentha, we can support directors seeking to utilise safe harbour protection through the entire process. Our services include:

Eligibility Assessment

We can assess whether your company meets the eligibility criteria for safe harbour.

Turnaround plan development

We can assist in developing a robust turnaround plan or evaluate an existing plan to determine if it is likely to provide a better outcome than liquidation.

Advice and monitoring

We offer ongoing advice and monitoring throughout the implementation of the turnaround plan to ensure that the company remains on track and compliant with safe harbour requirements.

Meet our specialists

Our national footprint allows our clients to work with industry experts who are experienced with geographic nuances. Contact our specialists to learn more about how KordaMentha can help your organisation navigate the complexities of seeking safe harbour protection.