What is Safe Harbour Protection?
Under section 588G of the Corporations Act 2001 (Cth) (“the Act”), company directors can be held personally liable for debts incurred if their company is insolvent. However, the safe harbour provisions in section 588GA provide protection from personal liability for insolvent trading, if directors take proactive steps to improve the company’s financial position.
If a director suspects insolvency, they must develop a strategy that is reasonably likely to achieve a better outcome for the company than immediate liquidation or administration.
Purpose of Safe Harbour Protection:
The primary objective of safe harbour is to encourage directors to maintain control and actively address financial difficulties, ultimately supporting business recovery. While this provision can shield directors from personal liability, their primary duty remains to act in the best interests of the company.
Conditions for Relying on Safe Harbour Protection:
To qualify for safe harbour protection, directors must:
- Be fully informed about the company’s financial status;
- Take measures to prevent misconduct by employees or officers;
- Maintain accurate financial records; and
- Seek professional advice from qualified experts.
The protection applies to debts incurred in connection with an approved course of action until it ceases to offer a better outcome, or an external administrator is appointed. However, protection is unavailable if the company fails to meet its employee entitlements or tax obligations.
To strengthen a claim for safe harbour protection, directors should:
- Identify signs of insolvency: assess whether the company can meet its financial obligations as they fall due.
- Ensure compliance with employee entitlements: maintain clear payroll records and ensure superannuation, leave entitlements, and wages are met to avoid disqualification from safe harbour protection.
- Meet tax obligations: submit business activity statements (BAS) and other tax filings as required to prevent penalties and maintain compliance.
- Develop a clear course of action: outline specific steps to improve financial health, such as cost-cutting measures, renegotiating contracts, or restructuring debt.
- Monitor financial performance: regularly review budgets, accounts, and asset management.
- Implement and adjust the restructure plan: continuously review and refine the plan to adapt to changing business conditions and external factors.
- Recognise when safe harbour ends: when the company fails to meet tax or employee obligations, the proposed course of action is no longer viable, or an administrator or liquidator is appointed.
Key Takeaways:
Safe harbour provisions offer directors an opportunity to restructure their business without facing personal liability for insolvent trading. However, directors must actively engage in financial recovery, maintain compliance with legal obligations, and document every step taken.
For tailored advice on safe harbour strategies and compliance, contact Daniel Morgan (daniel@morganenglish.com.au), Wayne Riggien (wayne@morganenglish.com.au) or Ersel Akpinar (ersel@morganenglish.com.au) and our Corporate + Commercial Team at Morgan + English today.
