Safe Harbour Protection for Directors — keep trading while you restructure, without personal liability

Section 588GA of the Corporations Act 2001 (inserted in 2017) provides a safe harbour from insolvent trading liability under section 588G for directors who take a prescribed course of action before the company incurs a debt. The director must start developing a course of action reasonably likely to lead to a better outcome for the company and its creditors than immediate administration or liquidation. If the conditions are met, debts incurred in connection with that course of action are excluded from any insolvent trading claim — giving the director protection to keep trading while the restructure is underway.

The director must: (1) start taking a course of action before the debt is incurred; (2) properly inform themselves about the company's financial position; (3) take steps genuinely likely to produce a better outcome for creditors — such as developing a turnaround plan, seeking professional advice, engaging with creditors, and exploring restructuring options; (4) ensure that employee entitlements — wages and superannuation — are paid as and when they fall due; and (5) ensure the company's tax lodgement obligations are current. If any of these conditions is not met, safe harbour may not be available for debts incurred during that period.

The "better outcome" test requires that the course of action being pursued is reasonably likely to result in creditors receiving more — or being in a better overall position — than they would receive if the company were immediately placed in voluntary administration or liquidation. This is assessed objectively at the time the relevant debts are incurred. A credible restructuring plan, supported by independent financial advice, projected cash flows, and evidence that the business is viable, will generally satisfy this test. Vague intentions to "sort things out" without a documented plan are unlikely to be sufficient.

Effective safe harbour documentation includes: board minutes or director resolutions recording the decision to pursue restructuring and the analysis undertaken; the written restructuring plan or turnaround strategy with financial projections; evidence of professional advice obtained (from lawyers, accountants, turnaround specialists); records showing employee entitlements and tax lodgements are current; correspondence with creditors and other stakeholders; and regular progress reviews against the plan. If the company later goes into liquidation, the director will need to demonstrate — to a liquidator or a court — that the conditions were genuinely met throughout the relevant period.

Safe harbour ends automatically when: (1) the course of action being pursued stops being reasonably likely to produce a better outcome for creditors; (2) the company enters formal administration, liquidation, or receivership; (3) the director stops taking the required steps — for example, employee entitlements fall into arrears or tax lodgements lapse; or (4) the director abandons the restructuring plan without replacing it with an equally credible alternative. Once safe harbour ends, any debts incurred after that point are no longer protected, and the director may be exposed to insolvent trading liability for those debts.

Safe harbour and voluntary administration (VA) are complementary tools. A director may use safe harbour while developing a restructuring plan and, if the plan requires creditor binding, transition to VA in order to propose a Deed of Company Arrangement (DOCA). Safe harbour ends when the VA commences, but debts incurred during the safe harbour period remain protected. Directors who follow the safe harbour process carefully before entering VA are in a much stronger position — they have documented their good faith, paid their people, and have a credible plan to present to creditors at the meeting of creditors during VA.