Navigating the safe harbour reforms

By Jennifer Ball

Safe harbour is now in play. What do you need to do to avail yourself of the protection the safe harbour offers? What about listed companies?

On 11 September 2017, major reforms to Australia's insolvency laws including an insolvent trading safe harbour and a restriction on the enforcement of ipso facto rights in certain circumstances passed through the Senate. These insolvency reforms amend relevant provisions of the Corporations Act.

The safe harbour provisions commenced on 19 September 2017.

Safe harbour

The objective of the safe harbour reforms is to encourage directors to pursue restructuring opportunities that will deliver a better outcome to stakeholders as compared with the immediate liquidation or administration of the company.

The insolvent trading safe harbour:

  • applies from the time the directors (who suspect the company is or may become insolvent) start to develop and implement one or more courses of action that are reasonably likely to lead to a better outcome for the company than immediate administration or liquidation; and
  • operates as a carve-out from the insolvent trading provisions of the Corporations Act (which otherwise remain unchanged), providing the directors protection from any personal liability for debts that are incurred by the company directly or indirectly in connection with any such course of action.

Directors can (subject to the safe harbour protection and already existing defences) however, continue to be personally liable for debts incurred by a company while it is insolvent and risk criminal prosecution if they dishonestly allow such debts to be incurred. It is often argued that these risks are a reason directors commence external administration prematurely when a viable restructuring may have been available. It is expected that the insolvent trading safe harbour will give directors greater comfort to pursue such restructuring opportunities.

Given their continued risk of personal liability for insolvent trading, directors must carefully consider and take advice on the operation of the safe harbour provisions in the context of the specific circumstances and restructuring initiatives being developed and implemented.

Who qualifies?

Directors acting honestly and diligently and who have ensured that the company has:

  • Complied with its obligations to maintain adequate books and records
  • Paid employee entitlements when due (including superannuation)
  • Kept up to date with its tax reporting obligations (being no more than three months in arrears)

Actions required

Non-prescriptive actions expected of directors in determining a "better outcome" for the company

  • Take steps to prevent misconduct by officers and employees
  • Take steps to ensure appropriate financial records are maintained
  • Obtain advice from an "appropriately qualified entity" (not defined)
  • Keep informed of the company’s financial position
  • Develop and implement a clear plan to restructure the company so as to improve its financial position


The Corporations Act does not define what an "appropriately qualified entity" is or what qualifications an adviser must possess. It is therefore important that an adviser's retainer carefully documents:

  • the agreed scope of work (and any specific exclusions); and
  • the particular individual adviser's qualifications and experience.

Advisers will also need to maintain appropriate levels of professional indemnity insurance.

As any administrator or liquidator must be independent in order to accept an appointment, advisory firms will need appropriate internal conflict management protocols in place. If a formal insolvency appointment is required, this will assist them in determining whether they are able to accept the appointment.


Directors cannot take a passive approach to a restructuring. The directors must act honestly and genuinely and access up-to-date financial information for the purpose of assessing the likely outcome of the restructuring. By doing so, directors will be in a position where they can properly understand the options available to the company and what a formal insolvency process might look like so as to assess what option presents a better outcome.

Directors must be personally involved in any turnaround strategy and, together with their advisers, keep detailed records of the chosen course of action, especially any key decisions. Directors bear the evidentiary onus of proof if they want to rely on the protection of safe harbour, so they should document their decision-making and steps taken as part of a restructure to assist them in justifying their actions, including showing that any debts incurred by the company were in connection with the restructuring plan.

It will be critical for directors to engage with stakeholders (such as financiers, suppliers, employees and customers) as, unlike liquidation or voluntary administration, the safe harbour does not introduce a statutory moratorium on enforcement. Appropriate standstill and other arrangements should therefore be used to give the company the time and breathing-space necessary to develop and implement any restructuring plan.

Safe harbour is not, however, intended to be a mechanism for a company to trade past the point where it continues to be viable. Safe Harbour protections apply for a reasonable period. Once it becomes clear that the company is not viable in the long term, it is unlikely that the better outcome test will be able to be satisfied and the protection of the safe harbour will cease.

Continuous disclosure

The ASX has strict continuous disclosure requirements for listed companies which are to be read in conjunction with ASX Guidance Note 8 "Continuous Disclosure Listing Rules". The Guidance Note has been updated to clarify the ASX's expectations on disclosure obligations where directors are relying on the insolvent trading safe harbour. Unsurprisingly, the position has not changed and the amended guidance merely clarifies that companies must continually assess compliance with continuous disclosure requirements.

While a company may (depending on the circumstances) have to disclose the course(s) of action developed and adopted as part of a restructuring, the mere fact that the directors may have formed the view that they have the benefit of the safe harbour is not, in and of itself, required to be disclosed as this is a legal outcome which, on its own, may not have a material effect on the price of the company's securities.

The status of the restructuring arrangements must be assessed on an ongoing basis and, where those arrangements cease to be confidential or a definitive course of action as part of the restructuring has been determined, the entity's ability to rely on these carve-outs may no longer be available. Disclosure must then be assessed as it would in any other situation.


Creditors that continue to supply to a company during a period where the directors are able to satisfy the requirements for safe harbour protection will have no recourse to the directors personally if the restructuring fails, and will only be able to recover amounts owed to them by the company through a formal insolvency process.

In our experience, while it is rare for a creditor to supply to a company on the basis of a director's potential personal liability for insolvent trading (and directors may still be personally liable for debts incurred by a company while it is insolvent, risking possible criminal prosecution if they dishonestly allow such debts to be incurred), this may be a factor in determining the terms upon which a supplier is prepared to continue providing credit terms to the company.


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