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The safe harbour provisions under section 588GA of the Corporations Act 2001 (Cth) provide directors with protection from personal liability for insolvent trading — but only if certain conditions are met. Introduced in 2017, the safe harbour provisions were designed to encourage directors to pursue restructuring and turnaround options rather than immediately placing their company into external administration at the first sign of financial distress.
At Boss Lawyers, we regularly advise directors navigating financial difficulty. This article provides a practical checklist for directors seeking to rely on the safe harbour, along with guidance on common mistakes and documentation requirements.
What Is the Safe Harbour Defence?
Under section 588G of the Corporations Act, directors have a duty to prevent insolvent trading. If a company incurs a debt while insolvent (or which causes it to become insolvent), and the director was aware of, or ought reasonably to have been aware of, reasonable grounds for suspecting insolvency, the director faces personal liability for that debt.
Section 588GA provides a defence: a director is not liable for insolvent trading if, at the time the debt was incurred, the director was developing or taking a course of action that was reasonably likely to lead to a better outcome for the company than immediate administration or winding up.
For more information, visit our safe harbour lawyers page.
The Safe Harbour Checklist
The following checklist covers the key elements a director must address to rely on the safe harbour defence. While not exhaustive, addressing each of these points significantly strengthens a director’s position.
1. Identify the Trigger Point
The safe harbour can only apply from the point at which a director begins to suspect (or ought to suspect) that the company may be insolvent or approaching insolvency. You must be able to identify when you first became aware of the financial difficulty. This is your starting point.
Documentation: Record the date and circumstances when financial distress was first identified. Keep board minutes and file notes.
2. Engage Appropriate Advisors
Seek advice from appropriately qualified professionals. This typically means:
- An accountant experienced in turnaround or restructuring
- A lawyer experienced in insolvency and director obligations
- A registered liquidator or restructuring practitioner (for a formal assessment of the company’s position)
Documentation: Keep engagement letters, advice received (in writing), and records of meetings with advisors.
3. Develop a Restructuring Plan
The core of the safe harbour is a course of action reasonably likely to lead to a better outcome. This means you need a genuine, considered plan — not just hope. The plan should:
- Identify the causes of financial distress
- Set out specific steps to address those causes
- Include financial projections and cash flow forecasts
- Identify milestones and decision points
- Be regularly reviewed and updated
Documentation: The restructuring plan should be in writing, with supporting financial models and assumptions clearly stated.
4. Maintain Proper Books and Records
Section 588GA(4)(a) expressly states that the safe harbour is not available if the company is failing to maintain proper books and records as required by section 286. This is a threshold requirement — without it, the safe harbour does not apply regardless of what other steps you take.
Checklist items:
- Financial statements are up to date
- Management accounts are current (monthly at minimum)
- Board minutes are maintained
- Register of members and officeholders is current
- BAS and tax returns are lodged
5. Pay Employee Entitlements
Section 588GA(4)(b) provides that the safe harbour is not available if the company is failing to pay employee entitlements as and when they fall due. This includes:
- Wages and salaries
- Superannuation contributions
- Leave entitlements
- Other statutory employment obligations
If you cannot pay employees, the safe harbour is not available to you. This is a hard requirement.
6. Lodge Tax Returns and Reports
Section 588GA(4)(c) requires that the company continue to comply with its tax reporting obligations. Ensure all tax returns, BAS statements, and other ATO lodgements are up to date.
7. Act in Good Faith
The safe harbour requires that the director is acting honestly and in good faith in pursuing the restructuring course of action. This means:
- No self-dealing or preference for personal interests
- Genuine belief that the plan can succeed
- Proper consideration of creditor interests
- Willingness to abandon the plan if circumstances change
8. Keep Creditors Informed (Where Appropriate)
While the Act does not specifically require disclosure to creditors during the safe harbour period, maintaining open communication with key creditors can demonstrate good faith and may assist in implementing the restructuring plan. Consider:
- Negotiating payment plans with key creditors
- Disclosing the existence of financial difficulty where necessary for the restructuring
- Avoiding incurring new debts that you know cannot be repaid
9. Monitor Progress Against the Plan
A one-off plan is insufficient. Directors must demonstrate ongoing, active engagement with the restructuring process:
- Regular board meetings to review progress
- Updated cash flow forecasts
- Assessment of whether the plan remains “reasonably likely” to achieve a better outcome
- Decision points at which the plan should be abandoned if milestones are not met
10. Know When to Stop
The safe harbour is not a licence to trade indefinitely while insolvent. If the restructuring plan is not working, or if circumstances change such that the plan is no longer reasonably likely to lead to a better outcome, the director must act. Continuing to trade beyond this point will take you outside the safe harbour.
Common Mistakes
In our experience, directors most commonly fall outside the safe harbour due to:
- Failing to document the plan: Verbal discussions and informal plans are difficult to prove. The safe harbour depends on demonstrating what you were doing and why.
- Falling behind on employee entitlements or tax: These are hard disqualifying conditions. Even one missed superannuation payment can take you outside the safe harbour.
- Not seeking professional advice: Directors who try to manage the turnaround without qualified advisors find it much harder to demonstrate that their course of action was reasonable.
- Continuing too long: Optimism is admirable, but the safe harbour requires objectivity. If milestones are being missed and the plan is not working, you must be prepared to pivot or appoint an administrator.
- Ignoring the books: Poor record-keeping is an automatic disqualifier.
Frequently Asked Questions
What is the safe harbour defence?
Under s588GA, directors are protected from insolvent trading liability if they were pursuing a course of action reasonably likely to lead to a better outcome than immediate administration or winding up.
Is safe harbour available if the company owes super?
No. Failing to pay employee entitlements, including superannuation, is a hard disqualifier under s588GA(4)(b).
Do I need a formal plan?
While no specific format is prescribed, a documented plan with financial projections and milestones is strongly recommended to demonstrate reasonableness.
How long can I rely on safe harbour?
There is no fixed time limit, but the plan must remain reasonably likely to succeed. Continuous reassessment is required.
Get Director Advice
If your company is facing financial distress, do not wait. Early action gives you the best chance of entering and maintaining the safe harbour. Contact Boss Lawyers on 1300 267 711 for confidential advice on your obligations and options.
About the Author
Mark Harley is the Principal of Boss Lawyers, a Brisbane CBD commercial law firm. Mark advises directors on their personal exposure in insolvency situations and helps develop safe harbour strategies and restructuring plans.
Disclaimer: This article provides general information only and does not constitute legal advice. You should obtain specific legal advice about your particular circumstances before acting on any of the matters discussed in this article.
