Australia’s Safe Harbour provisions protect directors from personal liability for insolvent trading while they undertake a restructuring likely to result in a better outcome for the company. Used correctly, safe harbour gives directors the space to act without the threat of personal financial ruin hanging over every decision, which usually leads to better outcomes for the company, its creditors, employees, shareholders and directors.
What Are Safe Harbour Provisions?
Australia’s safe harbour provisions were introduced in 2017 to protect directors from personal liability for insolvent trading while they develop and implement a restructuring course of action that is reasonably likely to lead to a better outcome for the company than immediately appointing an administrator or liquidator.
In plain terms: if your company is in financial difficulty and you take genuine, documented steps to turn it around, safe harbour gives you the legal breathing room to do that without the threat of personal liability for debts incurred during the process.
Safe harbour protection applies from the moment a director starts developing a course of action, not from when the plan is finalised. Directors who wait until they have a polished restructuring plan before engaging the provisions may lose protection for debts incurred in the interim.
Why Safe Harbour Was Introduced
Before 2017, the risk of personal liability often caused directors to appoint administrators prematurely, abandoning businesses that were financially distressed but genuinely viable. Safe harbour was designed to correct this by encouraging directors to seek advice early, explore restructuring options, and attempt to trade out of difficulty when there is a realistic prospect of doing so.
In December 2024, ASIC updated its Duty to Prevent Insolvent Trading: Guide for Directors to provide detailed, practical examples of how safe harbour can be used. It also set out the factors ASIC will consider when assessing whether a director has validly established protection.
What is Insolvent Trading, and Why Does it Matter to Directors?
A company is legally insolvent when it cannot pay its debts as and when they fall due. Directors have a positive duty to prevent an insolvent company from incurring further debts. Breaching this duty, knowingly or otherwise, can expose directors to serious consequences.
Common signs a company may be insolvent
- Ongoing operating losses with no clear path to recovery
- Persistent cash flow shortages
- ATO debts going unpaid, including PAYG and GST
- Employee wages, super or entitlements falling behind
- Suppliers demanding prepayment or tightening credit terms
- Difficulty obtaining new credit or refinancing existing facilities
- Creditors threatening or commencing legal action
If any of these apply to your company, it is time to get advice immediately.
What are the penalties for insolvent trading?
The consequences for directors who allow insolvent trading are significant and have increased substantially in recent years.
Civil liability is the most common risk, and the penalty for a breach is up to 5,000 penalty units — currently $1.65 million (at $330 per unit, as updated in November 2024) or three times the value of any benefit obtained, whichever is greater.
Criminal liability applies where the director’s failure to prevent the debt was dishonest. The criminal penalty is a fine of up to $220,000 or up to 5 years imprisonment, or both.
Disqualification from acting as a company director for up to 5 years is also a possible consequence of a civil or criminal finding.
When Does Safe Harbour Apply?
Safe Harbour provides protection if a director takes actions that are “reasonably likely to lead to a better outcome” for the company. The Corporations Act includes a number of appropriate Safe Harbour steps, such as:
- Taking action that prevents employee and officer misconduct
- Ensuring the company is keeping appropriate financial records
- Hiring a Qualified Adviser to provide professional advice
- Staying informed about the company’s financial situation
- Developing a Restructuring Plan
Taking steps along these lines indicates that directors are well-meaning. If your Restructuring Plan fails and you need Safe Harbour, demonstrating that you took these sorts of actions can help you claim protection.
What Does “Better Outcome” Actually Mean?
“Reasonably likely” does not mean “probably.” ASIC has clarified in RG 217 that “reasonably likely” does not require a better than 50% chance of success. It requires that a reasonable person could consider the outcome achievable based on the available information, which is a materially lower bar. Directors should not rule out safe harbour simply because they are uncertain whether the restructure will succeed.
“Better outcome” is assessed against immediate external administration. The comparison point is not an ideal outcome; it is whether the restructuring plan, even if it ultimately fails, produces a better result for the company and its creditors than walking straight into administration or liquidation today. This can include preserving employment, recovering more value from assets, and giving creditors a higher return than a fire sale would achieve.
Who Qualifies for Safe Harbour?
Safe harbour is not available to all directors automatically. Two hard eligibility conditions must be satisfied throughout the period of protection.
- Employee entitlements must be paid on time: This includes wages, accrued leave, and superannuation contributions. Many directors overlook super when thinking about employee entitlements, but falling behind on super payments will disqualify the company from safe harbour protection for debts incurred during that period.
- Tax reporting obligations must be up to date: This includes BAS statements, income tax returns, and other ATO reporting requirements. Note that the test is about lodgement and reporting, not necessarily about having fully paid all tax debts. Engaging with the ATO through a payment plan can still be consistent with safe harbour eligibility, provided reporting is current.
Safe harbour protection is also unavailable if there have been two or more instances of non-compliance with either of these conditions in the preceding 12 months.
Director Eligibility Checklist
Beyond the two mandatory conditions, directors seeking to rely on safe harbour should also be taking steps that demonstrate a genuine attempt to save the company. ASIC identifies the following as relevant:
- Employee entitlements (including super) are being paid as they fall due
- All ATO lodgements and reporting obligations are current
- The company is maintaining appropriate financial records
- A qualified adviser has been engaged or is being engaged
- The director is actively monitoring the company’s financial position
- A restructuring course of action is being developed with documented milestones
- Steps are being taken to prevent misconduct by officers or employees
- All insurance is adequate and current
- Key creditors and stakeholders are being communicated with honestly
ASIC’s Four Key Principles for Directors
In its 2024 Regulatory Guide, ASIC sets out four core principles that directors must follow in the context of their duty to prevent insolvent trading. These principles also inform how ASIC will assess whether a director has validly established safe harbour protection.
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1: Actively monitor company solvency
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2: Investigate financial difficulties promptly
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3: Obtain professional advice where necessary
Directors must regularly review cash flow, budgets, financial reports, and debt obligations. Directors can’t just rely passively on reports being provided to them. They must actively stay informed. Where a director has limited financial expertise, they should get advice in a form they can understand and act on.
What Safe Harbour Does and Does Not Cover
What Safe Harbour Covers
Safe harbour protects directors from personal civil liability for debts incurred while implementing the restructuring course of action. This includes:
- Ordinary operating expenses during the restructure (wages, supplier costs, rent, utilities)
- Professional fees for restructuring advisers, accountants, and lawyers
- New credit facilities or financing obtained as part of the restructure
- Equipment purchases that streamline or support the restructuring effort
- Any debt that is directly or indirectly connected to the restructuring course of action
If a significant expense falls outside your normal operations, be careful. Safe harbour only covers reasonable expenses connected to the course of action. Unusual or large expenditures should be documented carefully, with a clear explanation of how they serve the restructuring goal.
What Safe Harbour Does NOT Cover
Safe harbour is a defence to insolvent trading liability only. It does not provide blanket protection, and it will not help you if:
- You breach your general directors’ duties (care, diligence, good faith, proper purpose)
- You engage in misleading or deceptive conduct
- Your conduct constitutes phoenix activity
- You engage in dishonest or fraudulent behaviour
- Criminal liability arises
- Debts were already incurred before the course of action commenced
Developing a Restructuring Plan
A Restructuring Plan is a formal document that lays out the directors’ plan for saving a company from insolvency. This document not only acts as a roadmap, it serves as proof of your good intentions if you need to claim Safe Harbour.
Your Restructuring Plan should be a written document that includes details about:
- The objective. This will typically be to return to solvency, but it can also be a resolution to reach a “better outcome” than immediately appointing a Liquidator or Administrator.
- Your restructuring strategy. Include detailed information about the actions that will be taken to reach the objective (such as selling assets, downsizing, restructuring operations and refinancing credit).
- Milestones and measurement tools. The markers you will use to review your plan and measure whether your actions are having the desired effect.
- Professional advice. Provide information about any attempts to obtain professional help from a qualified adviser. This document should also be updated to include details about the advice you receive.
- Financial records audit. Conduct an audit of your financial systems (such as how finances are reported) and include the results to demonstrate you have taken reasonable steps to remain up to date on the company’s financial situation.
While you don’t necessarily need to consult a qualified adviser to claim Safe Harbour, we strongly recommend that you develop your Restructuring Plan with professional input. Professional advice greatly increases the likelihood of success and ensures that you will be entitled to Safe Harbour if the Restructuring Plan is unsuccessful.
Safe Harbour vs Voluntary Administration
Safe harbour | Voluntary administration | |
Director control | Retained | Lost (administrator takes control) |
Confidentiality | No public announcement required | Public process |
Moratorium on creditor action | None | Automatic once appointed |
Cost | Lower | Higher |
Timeline | Flexibility determined by plan | Governed by statutory deadlines |
Outcome if unsuccessful | Can transition to VA or liquidation | DOCA, return to directors, or liquidation |
Best suited for | Viable businesses needing restructuring room | Businesses needing creditor pressure relieved immediately |
How SV Partners Can Help
The team at SV Partners are financial advisors with decades of experience in Restructuring, Liquidation and Voluntary Administration. Our expertise allows us to assess your business’s position and develop a tailored strategy for resolving financial distress. Where appropriate, we can also determine whether you are eligible for Safe Harbour and provide advice on your Restructuring Plan.
Early advice gives you more options. The sooner you engage, the more tools remain available to you.
For an obligation-free consultation, you can contact us online, or phone our confidential assist line on 1800 246 801.