1. What is Safe Harbour?

Safe Harbour is a legal protection for company directors under section 588GA of the Corporations Act 2001 (Cth).

It provides a “safe harbour” from personal liability for insolvent trading when directors take proactive steps to develop and implement a course of action that is reasonably likely to lead to a better outcome for the company than immediate liquidation or administration.

It protects company directors from personal liability for insolvent trading while they are developing and taking a course of action reasonably likely to lead to a better outcome for the company than immediate external administration.

Safe Harbour is a defence to a liquidator’s claim (if a company enters into liquidation) that insolvent trading has occurred.

Safe Harbour provides responsible directors with breathing space to pursue turnaround or restructuring options without the immediate threat of personal liability. It’s a framework for good governance under financial distress. Used properly, it protects both directors and the value of the business.

Case study. A successful British pan-asian restaurant chain provides a franchise to an Australian operator. The Australian business plan anticipates the opening of 10 restaurants over 36-months in Australian capital cities. The fourth and fifth opening were not performing to budget expectations for revenue and profitability. It was adversely affecting cashflow. The next planned cash injection was not scheduled to occur for 12-weeks. If there wasn’t a restructure or business reset, the business would run out of cash before the end of 12-weeks. (This is a common situation for fast-growth businesses). Safe Harbour and implementation and development of a plan is an alternative to immediate SBR, VA or liquidation. Safe Harbour will provide a defence to insolvent trading if the business does enter liquidation.

Safe Harbour encourages early engagement and professional advice to preserve business value, rather than forcing premature VA, liquidation or SBR. Safe Harbour could lead to VA or SBR.

Entering Safe Harbour requires an immediate transition to crisis management, rather than continuation of routine operations. At this stage, a company may be aware that issues exist or even understand their nature but the existing internal and external advisors often do not possess the capacity or expertise to address them with sufficient speed or effectiveness.

It is therefore essential to engage specialist restructuring and turnaround professionals who can:

• stabilise cash flow;
• protect critical relationships; and
• assess the viability of both individual components and the business as a whole.

This structured and expert-led response is fundamental to providing the business with the best opportunity for survival and recovery. This is not a sales pitch – it is a statement of fact.

2. Why Safe Harbour Matters

Under section 588G, directors can be personally liable for debts incurred when the company is insolvent.
Safe Harbour tempers that risk by allowing directors to explore restructuring and turnaround options responsibly, while maintaining control of the business.

3. Preconditions for Safe Harbour Protection

Directors can rely on Safe Harbour only if the company qualifies.

To qualify:

• Employee entitlements (including superannuation) are paid when due and not in arrears.
• Tax reporting obligations are up to date.
• Proper books and records are maintained.
• The company is developing or taking one or more courses of action that are reasonably likely to lead to a better outcome.

If these are not met, Safe Harbour protection does not apply.

4. What is a “Better Outcome”?

A “better outcome” means an outcome better for the company, its creditors, or shareholders than immediate voluntary administration or liquidation.

The phrase is deliberately broad.

Examples of better outcomes include:

• Trading out of temporary financial distress.
• Refinancing or negotiating with the ATO and key suppliers.
• Implementing cost-cutting or asset sales.
• Transitioning into a Small Business Restructure (SBR) plan.

5. Establishing and Maintaining Safe Harbour

Directors should demonstrate that they are acting responsibly and systematically.

Typical steps include:

• Directors to recognise potential cashflow pressures.
• Directors to obtain independent advice preferably from a registered liquidator or person with deep experience in restructuring.
• Develop a plan including 3-way forecast (P&L, balance sheet, cashflow).
• Implement actions. Execution of cost cutting negotiations etc.
• Monitor progress. Ongoing directors’ reviews and updated forecasts.
• Adjust and reset as necessary including refinement or new strategies.

Safe Harbour ends when the directors stop taking the course of action or when it no longer appears reasonably likely to lead to a better outcome.

6. Role of Professional Advisors

Directors should seek early advice from:

• A registered liquidator or restructuring expert for independent assessment.
• Accountants to prepare reliable forecasts.
• Lawyers to ensure governance and documentation are sound.

This advice should be recorded and integrated into board decisions.

7. Relationship Between Safe Harbour and Small Business Restructuring (SBR)

Directors remain in control during safe harbour and SBR. The objective of safe harbour is to prevent insolvent trading while developing a plan, and to use safe harbour protection as a defence against personal liability for insolvent trading if the worst does occur, and a liquidator is appointed. Directors can enter into SBR immediately. It is not a pre-condition to first enter into safe harbour.

8. Common Examples

Example 1 – Hospitality

A restaurant group faces declining sales and tax arrears. The directors can immediately enter into SBR. Upon entering into SBR, they can prepare forecasts and develop an SBR plan. Alternatively, for larger businesses, or for businesses that can with time obtain debt or equity funding, they may not be ready for SBR (or VA) and first enter into Safe Harbour and prepare forecasts and develop a plan perhaps in conjunction with landlords and others and then if necessary pivot to a formal restructure like VA or SBR or an informal restructure.

Example 2 – Construction

A builder faces delayed project payments and rising material costs. The directors seek advice, suspend unprofitable jobs, and refinance equipment. They can either enter SBR immediately, or if not ready, or uncertain and require modelling and a plan, the directors could enter safe harbour and later, for example, SBR or VA followed by a DOCA or an informal route. There is no one size fits all. The key to successful outcomes is to take advice on the options early.

9. Practical Checklist

To rely on Safe Harbour directors should ensure:

• Financial accounts and management reports are current.
• 3-way cash flow forecast is prepared.
• Minutes document board decisions and advice received.
• Entitlements and tax obligations are met.
• External advisors are engaged and independent.
• Progress is regularly reviewed and updated.

10. Key Legislative References

Corporations Act 2001 (Cth)

• Section 588GA – Safe harbour for insolvent trading.
• Section 588G – Director’s duty to prevent insolvent trading.
• Part 5.3B – Small Business Restructuring (for comparison).

11. Summary

Safe Harbour provides responsible directors with breathing space to pursue turnaround or restructuring options without the immediate threat of personal liability.  it’s a framework for good governance under financial distress. Used properly, it protects both directors and the value of the business.