Safe Harbour: How Directors Can Protect Themselves from Insolvent Trading Claims

The Scenario

Consider a scenario where a director of a mid-sized Queensland construction company realises the business is in financial difficulty. Revenue has dropped sharply due to project delays, several major debtors are overdue, and the company is struggling to pay creditors on time. The director suspects the company may be insolvent — or approaching insolvency — and is concerned about personal liability for debts incurred from this point forward.

Rather than immediately placing the company into administration, the director wants to explore whether the business can be restructured and returned to profitability. But how can they do this without exposing themselves to an insolvent trading claim?

The Legal Framework

Insolvent Trading — The Risk

Under section 588G of the Corporations Act 2001 (Cth), a director has a duty to prevent a company from trading while insolvent. A company is insolvent if it is unable to pay its debts as and when they become due and payable (s 95A). If a director allows the company to incur debts while insolvent — and a reasonable person in their position would have suspected insolvency — the director can face personal liability for those debts.

Liquidators regularly pursue insolvent trading claims against directors, and the amounts involved can be substantial.

The Safe Harbour Defence

Section 588GA of the Corporations Act provides a “safe harbour” defence. Introduced in 2017, this provision protects directors from personal liability for insolvent trading if, after they begin to suspect insolvency, they start developing one or more courses of action that are reasonably likely to lead to a better outcome for the company than immediate administration or liquidation.

To rely on safe harbour, a director must demonstrate that they:

• Were taking steps that were reasonably likely to lead to a better outcome than immediate external administration
• Were properly informed about the company’s financial position
• Were taking appropriate steps to ensure the company was keeping proper financial records
• Were taking appropriate steps to ensure employees’ entitlements (superannuation, wages) were being paid
• Were obtaining advice from an appropriately qualified entity (such as an accountant, restructuring adviser, or lawyer)

How It Typically Unfolds

A director facing this type of situation would generally take the following steps to engage safe harbour protections:

1. Recognise the warning signs early — declining cash flow, inability to pay creditors on time, ATO debt mounting, creditor pressure increasing
2. Engage qualified advisers immediately — appoint a restructuring professional or insolvency practitioner to assess the company’s position and develop a turnaround plan
3. Document everything — maintain detailed records of all decisions, financial analysis, adviser recommendations, and the rationale for continuing to trade
4. Ensure compliance obligations are met — employee entitlements (especially superannuation) must remain current, and tax reporting obligations must be maintained
5. Develop and implement a restructuring plan — this might involve renegotiating supplier terms, reducing overheads, chasing debtors, seeking new capital, or pursuing a formal restructuring mechanism
6. Monitor continuously — regularly reassess whether the course of action remains reasonably likely to achieve a better outcome
7. Act decisively if the plan fails — if the restructuring is not working, the director must be prepared to appoint an administrator or liquidator promptly

Key Takeaways

• Safe harbour is not a “get out of jail free” card. It requires active, documented steps toward a genuine restructuring — not simply continuing to trade and hoping things improve
• Timing is critical. Safe harbour protection applies to debts incurred after the director begins developing the course of action. Earlier debts may still attract liability
• Professional advice is essential. Engaging appropriately qualified advisers is a key factor courts will consider when assessing whether safe harbour applies
• Records matter. If a liquidator later challenges the director, the quality of contemporaneous documentation will be critical to the defence
• Employee entitlements cannot be neglected. Failing to pay superannuation or wages undermines a safe harbour claim and can trigger separate director penalty notices from the ATO

When to Seek Legal Advice

If you are a director concerned about your company’s solvency, getting legal advice early is essential. The sooner you act, the stronger your position — both for protecting the business and for protecting yourself personally.

For guidance on insolvency, director duties, and safe harbour, visit Boss Lawyers — Insolvency & Restructuring or call 1300 267 711.

For strategic advice on director duties, personal liability, and shareholder disputes, speak with our experienced director dispute lawyers Brisbane. Call Boss Lawyers on 1300 267 711 or complete our online enquiry form today.

This is general information only and is not legal advice. You should obtain professional advice specific to your circumstances.