When a business starts to struggle, the pressure on the company’s directors can feel overwhelming. Cashflow tightens, creditors call, and the board faces a difficult question: do we keep trading and try to turn things around, or call it quits?
Get it wrong one way and the directors may be personally liable for debts that the company can’t pay. Get it wrong the other and you may close a business that could have been saved.
Safe Harbour provisions under Australian corporations law exist for exactly this scenario. These provisions protect you from personal liability for insolvent trading while you develop and carry out a genuine plan to rescue the business, as long as that plan is reasonably likely to lead to a better result than appointing an administrator or liquidator straight away. It applies to any company, including family businesses, SMEs and private companies.
What Safe Harbour protects you from
Directors have an active duty to prevent a company from insolvent trading. If a director breaches that duty, they can be personally liable for those debts. For years, that risk pushed directors into administration early, even when the business may have had a real chance of recovering.
The Safe Harbour provisions in section 588GA of the Corporations Act 2001 (Cth) offer a defence to that liability while you work on a turnaround in accordance with your restructure plan.
There are two key features of the Safe Harbour provisions worth noting. First, whether you can rely on the Safe Harbour provisions depends on whether your plan was reasonable when you adopted it, not whether it worked. A plan that fails despite proper advice and careful execution can still offer protection. Second, the Safe Harbour provisions protect the directors personally, not the company. Creditors can still issue demands and pursue recovery against the company while you restructure.
The protection has limits. It won’t cover dishonest conduct, transactions designed to put assets beyond creditors’ reach, or a plan you keep running after it has clearly stopped working. It is also only available if the following baseline conditions are met:
- Company books and records must be up to date and accurate;
- Employee entitlements (such as superannuation) must be paid on time; and
- All tax lodgements must be current.
If you later rely on the Safe Harbour provisions, it falls to you to show you have qualified to rely on the defence. This is one of the many reasons why it is critical to keep detailed records of steps taken to carry out the plan.
If you’re weighing up whether to keep trading, you don’t have to make that call alone. We can give you a preliminary view on whether Safe Harbour is available to you. Call us on 1300 654 590 or email wehelp@adlvlaw.com.au to talk through your position.
When to get advice
Seek professional advice as early as you can. The Safe Harbour provisions only help if you start putting a plan in place before insolvency becomes unavoidable. Common warning signs are cashflow shortfalls that keep coming back, credit facilities at their limit, tax payments falling behind and payment disputes with major creditors. If any of these sound familiar, it’s time to talk to someone.
For small businesses, there is another option. Companies with liabilities under $1 million can use the Small Business Restructuring process under the Corporations Act, which pauses creditor enforcement while creditors vote on a plan to compromise the company’s debts. Unlike Safe Harbour, it is a formal, public process run by a registered practitioner. Some businesses start with Safe Harbour to stabilise and move into Small Business Restructuring if they need a formal deal with creditors.
Every week you wait narrows your options. Call us on 1300 654 590 or email wehelp@adlvlaw.com.au to talk through your position.
How ADLV can help
We can advise directors on whether the Safe Harbour protections are available to them and help build and document a plan that will stand up to scrutiny. We also work alongside your accounting and finance team to carry it out.
If you’d like a preliminary view on your specific situation, call us on 1300 654 590 or email wehelp@adlvlaw.com.au. We’ll connect you with a great lawyer who can guide you to the right solution.
