by Shaw Gidley03.11.22

What is Safe Harbour and how can it protect directors?

With economic conditions remaining rocky, businesses, and their directors, continue to operate in stressful times – operationally, financially and emotionally.

A big worry is insolvency. Not only can it spell the end, but under Section 588G (2) of the Corporations Act (‘The Act’), if a business continues to trade while insolvent, directors can be held liable for certain company debts incurred.

The good news is directors can protect themselves and turn their businesses around by entering safe harbour. But what is safe harbour, and how does it work?

Safe harbour law was established under the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Act 2017 as part of the government’s National Innovation and Science Agenda.

It is a set of provisions in The Act (Section 588GA (1)) that protect directors of distressed companies from insolvent trading liability.

The overarching purpose of the safe harbour provisions is to encourage directors to seek restructuring advice early to save their companies, rather than shutting them down prematurely to avoid being held liable.

Essentially, safe harbour is an insurance policy. This means you claim protection under it after the fact. If accusations of insolvent trading are made against a company, a director can use safe harbour as a form of legal defence.

For a director to qualify for safe harbour protection, the company must ensure they meet the following conditions:

  • Pay all employee entitlements, including super, as and when they fall due
  • Comply with all tax reporting requirements, lodging when due
  • Develop courses of action that are ‘reasonably likely to lead to a better outcome’ than voluntary administration or liquidation

Unlike formal insolvency appointments, safe harbour has no time limit. Safe harbour only ends due to one of the following reasons:

  • The company stops taking the course of action
  • The course of action stops being reasonably likely to lead to a better outcome
  • The company goes into administration or liquidation

If a company goes into administration or liquidation, directors may also lose safe harbour protection if they fail to do any of the following:

  • Provide a completed Report on Company Affairs and Property (ROCAP) to the administrator or liquidator
  • Share the company books as required under the Act
  • Give information about the company when required
  • Assist the administrator or liquidator

Actions considered ‘reasonably likely to lead to a better outcome’ include:

  • Obtained advice from an appropriately qualified ARITA specialist who was given enough information to provide appropriate advice
  • Developing and implementing a turnaround plan for restructuring the company to improve its financial position
  • Taking steps to ensure the company is keeping adequate financial records for its size and type
  • Being properly informed of the company’s financial position
  • Taking appropriate steps to prevent misconduct by managers and staff that could impact the ability of the company to pay its debts

Engaging a qualified specialist may seem like an unnecessary cost when cash is tight, but they bring great value. As well as assisting in creating a solid turnaround plan, one you may not have considered on your own, they can keep you on track.

Importantly, the safe harbour defence only applies to debts directly or indirectly connected with the proposed course of action under the turnaround plan.

In addition, all of the above actions and conditions are ongoing. This means a director must continue to ensure all are being met. The company must also take adequate steps to ensure it is complying with the course of action.

Ensure safe harbour and turnaround success

If a company is financially struggling, accessing safe harbour protects directors from being held personally liable for their company debts. It also gives them the breathing space to carry out a plan.  

To ensure a sound safe harbour defence, you need good governance and best financial practices in place. You also need to act swiftly.

The sooner a director decides on safe harbour protection, gets their ducks in a row and engages a qualified specialist, the better the chances of them being protected and turning their business around.

If you or a client are financially struggling right now, contact our experts at Shaw Gidley today on (02) 4908 4444 or (02) 6580 0400 for free initial advice. Please be assured that all discussions are confidential.