On 20 January 2025, The Star acknowledged in an ASX report that it continues to seek advice in respect of the safe harbour provisions under the Corporations Act 2001 (Cth) (Corporations Act). [1]
This has garnered significant media attention and provides an opportune time to remind directors of their obligations pursuant to the Corporations Act and how the safe harbour provisions can be engaged to protect their own interests.
Personal Liability for Insolvent Trading
Pursuant to section 588G of the Corporations Act, directors have a duty to prevent insolvent trading. This duty requires directors to prevent the company from incurring a debt where the company is insolvent or likely to become insolvent as a result of incurring that debt.
The consequences for directors that engage in insolvent trading (without a defence) are significant and may include:
(a) personal liability for the debts incurred by the company while insolvent (i.e. piercing the corporate veil); and in certain circumstances
(b) disqualification from managing a corporation; and
(c) pecuniary penalty orders.
What is safe harbour?
The safe harbour provisions are contained in section 588GA of the Corporations Act and provide a defence to a claim of insolvent trading that may be made by a subsequently appointed liquidator of the company. In order to engage the protection the directors must take a ‘course of action’ which is reasonably likely to lead to a better outcome for the company and its creditors than the immediate appointment of an administrator or liquidator to the company. This is often called the Plan.
It is usual for a Plan to include the company:
(a) undertaking a capital raising;
(b) implementing cost-saving initiatives;
(c) negotiating or compromising key creditor claims or building support for a restructuring plan with key creditors and stakeholders; or
(d) selling part of its business, in appropriate circumstances.
Further, to rely on the safe harbour protections, each debt that is incurred following the commencement of the Plan must be incurred in furtherance of the Plan or otherwise be a debt incurred in the ordinary course of the company’s business.
Directors will not be protected in respect of debts which are incurred where the company:
(a) fails to, after a reasonable period following the incursion of the debt, implement a Plan;
(b) ceases to abide by the Plan (or amended Plan);
(c) continues to trade in accordance with a Plan in circumstances where the Plan ceases to be reasonably likely to lead to a better outcome for the company than the appointment of an administrator or liquidator; or
(d) has an administrator or liquidator appointed over it.
The above evidences the importance of directors taking action in a timely manner. If a director fails to take action within a reasonable time after the incursion of a debt they won’t be protected in any subsequent claim made in respect of that debt.
Guidance from ASIC
Practitioners and directors seeking to rely on the safe harbour provisions will be well assisted by referring to ASIC Regulatory Guide 217 (Guide) which was published last month.[2] The Guide provides a helpful blend of detailed guidance as well as practical examples of when reliance on safe harbour may be available. You can view the guide here.
Takeaway
The safe harbour protections provide a flexible way in which a company can restructure, without having to publicly disclose a restructuring plan has been put into effect. However, in order for the safe harbour protections to be effective, directors must take prompt steps to obtain professional advice if there are reasonable grounds to suspect your company is insolvent or likely to become insolvent.
If you are seeking advice as to whether the safe harbour provisions apply to you, speak to a member of Pragma Lawyers' Restructuring & Insolvency team today.
[1] https://www.starentertainmentgroup.com.au/wp-content/uploads/2025/01/ASX-Announcement-20-01-2025-Quarterly-Activities-Report-For-The-Period-Ended-31-December-2024.pdf
[2] https://download.asic.gov.au/media/f4moc3we/rg217-published-6-december-2024.pdf
