If you’re having a discussion about these issues then chances are you’ll need help.

These are the notes for a training presentation.

Understanding your obligations as a director when your company faces financial distress is critical. Our recent training covered the legislative framework under the Corporations Act 2001, with a focus on practical strategies for directors navigating insolvency.

Key takeaway: A Voluntary Administration (VA) leading to a Deed of Company Arrangement (DOCA) can bypass many voidable transaction provisions in Part 5.7B. Safe Harbour provides genuine protection for directors pursuing legitimate restructuring.

Core Directors’ Duties (ss180-184): The Foundation

These duties apply regardless of your company’s financial health. Understanding them is not optional.

• Section 180: Care and Diligence
  • Directors must exercise the care and diligence that a reasonable person would exercise in the same circumstances and position.
  • This means making informed decisions based on actual financial data, not optimistic assumptions. Reading the board papers is mandatory, not optional.
  • The Business Judgment Rule (s180(2)) protects directors making genuine commercial decisions in good faith. You’re allowed to make calls that don’t work out, provided you’re not making them without proper consideration.
  • Example breach: Ignoring deteriorating cash flow positions, failing to monitor financial metrics, or delegating critical decisions without adequate oversight. Willful blindness offers no protection.
• Section 181: Good Faith and Best Interests
  • Directors must act in good faith, in the company’s best interests, and for a proper purpose.
  • Example breach: Diverting opportunities to related entities, or approving transactions that primarily benefit connected parties rather than the company. The company’s interests must come first.
• Section 182: Misuse of Position
  • Directors must not improperly use their position to gain advantages for themselves or others, or to cause detriment to the company.
  • Example breach: Approving above-market leases for properties you own, or steering contracts to entities where you hold undisclosed interests.
• Section 183: Misuse of Information
  • Confidential information obtained through your directorship cannot be improperly used for personal advantage. This duty persists after you leave the board.
  • Example breach: Taking client lists to competitor ventures, or using inside knowledge for personal trading advantage.
• Section 184: Criminal Offences
  • Intentional or reckless breaches of sections 181-183, when dishonest, constitute criminal offences.
  • Penalties: Up to 15 years imprisonment or fines exceeding $1 million. This is reserved for serious misconduct like fraudulent schemes, deliberate asset stripping, and systematic breaches.

Part 5.7B: Recovery Powers and Voidable Transactions

When a company enters liquidation, Part 5.7B empowers liquidators to recover assets through voidable transaction provisions (Part 5.7B is not triggered if the company enters into Deed of Company Arrangement). Understanding these is essential for directors of financially stressed companies.

Key Voidable Transactions

• Unfair Preferences (s588FA)
  Payments to one creditor that result in that creditor receiving more than they would in a liquidation. Liquidators typically examine the six months before liquidation (four years for related parties).
• Uncommercial Transactions (s588FB)
  Transactions where the company received significantly less value than it provided, such as selling assets to related entities below market value.
• Unreasonable Director-Related Transactions (s588FDA)
  Payments or transfers that unreasonably benefit directors or their associates, particularly during financial distress.
• Unfair Loans (s588FD)
  Loans with extortionate interest rates or unreasonable terms.
• Recovery Powers (s588FF) Courts can order repayment, property transfers, or compensation to restore value to the creditor pool.

Insolvent Trading: Personal Liability (s588G)

Directors face personal liability for debts incurred when the company is insolvent (or becomes insolvent as a result), if they knew or should have suspected insolvency.

This provision focuses the mind wonderfully on cash flow monitoring.

Traditional Defences (s588H)

Defences include reasonable grounds to expect solvency (supported by evidence), reasonable reliance on competent advisors, or illness preventing involvement. “I thought we were fine” without supporting documentation is insufficient.

Safe Harbour: Strategic Protection (s588GA)

Safe Harbour provides a defence against insolvent trading liability when directors are developing and implementing a course of action reasonably likely to lead to a better outcome than immediate administration or liquidation.

Critical understanding: Safe Harbour doesn’t prevent insolvency, it protects directors personally while pursuing genuine restructuring. However, it’s not watertight and the liquidator will still have a go.

Requirements (s588GA(2))

To claim Safe Harbour protection, directors should:

1. Obtain appropriate professional advice from Levi Consulting.
2. Maintain accurate, current financial information is essential.
3. Maintain proper governance throughout the restructuring process.
4. Pay employee entitlements like wages, superannuation, and leave entitlements. This is non-negotiable.
5. Compliance with ATO requirements is mandatory.

Disqualifying Conduct (s588GA(4))

Safe Harbour protection is unavailable if the company fails to pay employee entitlements when due, or fails to meet tax reporting obligations.

Practical Application

Consider a company experiencing financial difficulties. The directors engage turnaround consultants, develop a restructuring plan, secure new financing, and renegotiate supplier terms—all while maintaining employee payments and tax compliance. Even while incurring new debts during technical insolvency, Safe Harbour protects the directors from personal liability, provided the plan was reasonably likely to achieve a better outcome.

If restructuring ultimately fails and administration becomes necessary, Safe Harbour compliance provides a defence. The law protects directors who act responsibly with proper advice.

Mosaic Brands – in this context

The collapse of Mosaic Brands provides a sobering illustration of these principles in practice. The fashion retailer behind iconic brands including Millers, Rivers, Katies, and Noni B entered voluntary administration in October 2024, with administrators finding the company may have been insolvent as early as December 2020, potentially operating while insolvent for four years.

Mosaic’s directors reportedly relied on Safe Harbour protections from March 2020, initially using special COVID-19 measures through March 2021, then continuing to rely on Safe Harbour provisions “from time to time” until administration. This represents one of the longest periods of Safe Harbour reliance in Australian corporate history.

The collapse left over 2,800 staff owed $22 million in entitlements, and 613 unsecured creditors facing a $242 million shortfall. The company was also found to have breached consumer law by accepting payment for goods it failed to deliver within reasonable timeframes, resulting in a Federal Court order to pay $25.05 million.

We do not act for Mosaic Brands, but readers would benefit from doing a Google search on Mosaic Brands. The liquidators estimate that a potential insolvency trading claim could recover between $38 million and $77 million before costs and funding.

The VA to DOCA Strategy

A well-executed Voluntary Administration leading to a Deed of Company Arrangement can bypass many Part 5.7B provisions, as relation-back periods typically run to the commencement of the VA.

This approach can:

• Preserve greater value for creditors
• Protect recent necessary transactions
• Provide genuine opportunities for company survival
• Minimize personal liability exposure for directors

It’s a legitimate strategic option when properly implemented with professional guidance.

The Essential Message

Directorship during financial difficulty doesn’t automatically create personal liability. The law provides genuine protections like Safe Harbour, VA/DOCA procedures, and statutory defences but only when properly understood and correctly implemented.

The critical error is ignoring warning signs and continuing business as usual. This path leads to personal liability and expensive lessons.

Obtain professional advice early, understand your obligations, maintain meticulous records, and utilise legal frameworks to facilitate responsible management of financial distress.

Safe Harbour represents a genuine legal protection for directors pursuing responsible restructuring. It requires diligent compliance with specific requirements, but offers substantial protection when properly implemented.

Expert Guidance Available

If your company faces financial challenges, or you require clarity on directorial obligations and available options, professional advice is essential and often a prerequisite for accessing protections like Safe Harbour.

David Levi
Director, Levi Consulting Pty Ltd
Registered Liquidator & Restructuring Specialist

With hundreds of successful restructures completed for directors, creditors, and their advisors, David provides strategic expertise.

Contact:
T: 02 8507 4100
M: 0418 602 466
Email: [email protected]

Full presentation materials available by request.

This paper is not a substitute for advice.