With Karina Romanova
The Safe Harbour provisions under the Corporations Act are one of the most powerful and misunderstood tools available to directors of financially distressed companies.
For accountants, advisors, and directors, Safe Harbour can create a pathway to keep trading while working toward a better outcome for the company, while mitigating the risk of personal liability for insolvent trading (to the extent the Safe Harbour criteria are satisfied).
But timing, compliance, and documentation are everything.
Why Safe Harbour matters
When a company is in financial trouble, directors have a duty to prevent it from trading while insolvent. If a company continues to incur debts when it is insolvent, or likely to become insolvent, directors may become personally liable for those debts if the company later enters liquidation.
Safe Harbour provisions can provide directors with a defence to insolvent trading claims where, at the time the debts are incurred, they are actively developing and implementing a course of action that is reasonably likely to produce a better outcome for the company than an immediate administration or liquidation.
The early warning signs
Advisors are often the first to spot when a company is under pressure. Common warning signs include:
- deteriorating working capital
- growing director loan accounts
- increasing ATO debt
- delayed creditor payments
- ongoing cashflow pressure
These signs should never be ignored. The earlier they are addressed, the more options remain available.
What Safe Harbour actually means
In simple terms, the Safe Harbour provisions protect directors where they are taking genuine, informed steps to implement a course of action which may improve the company’s financial position. That course of action must be reasonably likely to lead to a better outcome than immediately winding the company up.
The course of action cannot be based on blind optimism or wishful thinking. It means that there must be an objective and supportable basis for the plan.
The key question is this: Will this plan deliver a better result than putting the company straight into voluntary administration or liquidation today?
That could mean preserving the business, improving creditor returns, or achieving a more orderly outcome. One thing to note is that directors do not get the benefit of Safe Harbour just because they say they are trying to fix things. There are important conditions that must be met before these protections are available.
To access Safe Harbour:
- employee entitlements must be paid when due, including superannuation
- tax lodgements must be up to date
If these basics are not in order, Safe Harbour is unlikely to apply. It also only protects debts incurred in the ordinary course of business while the course of action is being implemented.
What a proper Safe Harbour plan looks like
A Safe Harbour strategy must be active, informed, and well documented. In practice, the first step is engaging a qualified advisor – often one specialising in insolvency or restructuring – to help assess the company’s position and build a workable plan.
Courts may look at factors such as whether the director:
- properly informed themselves about the company’s financial position
- took steps to prevent misconduct that could adversely affect the company’s ability to pay all its debts
- obtained advice from an appropriately qualified advisor
- developed and implemented a restructuring plan
- maintained proper books and records
In practice, this means directors should be able to show that they:
- sought professional advice early
- maintained reliable and up-to-date financial information including management accounts
- prepared current cashflow forecasts, often a 13-week rolling forecast
- had regular meetings and kept records of key decisions
- regularly reviewed the plan and its progress and adjusted it where needed
A plan that is poorly documented is unlikely to satisfy the Safe Harbour requirements.
What Safe Harbour does not protect against
Safe Harbour is important, but it is not a blanket protection. It is a defence to insolvent trading only.
It does not protect directors from:
- breaches of directors’ duties
- voidable transaction claims
- illegal phoenix activity issues
That distinction matters. Directors still need proper advice about the full range of risks they may face.
When Safe Harbour ends
Safe Harbour protections do not last forever. They can end when:
- no course of action is developed within a reasonable time
- the director stops implementing the plan
- the plan is no longer reasonably likely to lead to a better outcome
- an administrator or liquidator is appointed
This is why regular review is essential. A plan that was sensible one month ago may no longer be viable later.
The biggest issue in practice is delay. Safe Harbour is not there to rescue a business that has already gone too far. It is there to help responsible directors act early, understand their position, and either pursue recovery or move to an orderly insolvency process if needed.
By the time many directors seek help, the window has already narrowed and formal insolvency may be the only option left.
Safe Harbour is not about avoiding reality. It is about facing it early. For directors and advisors, the message is simple:
- know the warning signs
- act early
- get proper advice
- keep lodgements, super, and financial records up to date
- document every step of the turnaround plan
Done properly, Safe Harbour can protect directors, preserve value, and create better outcomes for companies and creditors alike. If a business is under pressure, early advice can make all the difference.
If you would like to speak to Liam or any one of our skilled practitioners, please get in touch today.
(61) 2 9232 3322
obp1@obp.com.au
obp.com.au