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Safe harbour
Practical Law ANZ Glossary w-019-6726 (Approx. 5 pages)
Glossary
Safe harbour
A statutory exception to civil liability for insolvent trading on which a director or a holding company of an insolvent company may rely in certain circumstances.
A director of a company has a duty to prevent the company from trading while insolvent. A director will breach that duty (and face civil liability as a result) if:
- They are a director of a company at the time when the company incurs a debt.
- The company is insolvent at the time the debt is incurred, or becomes insolvent by incurring that debt, or by incurring at that time debts including the debt.
- At that time, there are reasonable grounds for suspecting that the company is insolvent, or would become insolvent (as the case may be). That is:
- the director is aware at that time that there are grounds for suspecting the company is insolvent; or
- a reasonable person in a like position in a company, in the company's circumstances, would be aware.
(Section 588G(1) and (2), Corporations Act 2001 (Cth) (CA 2001).)
Under section 588GA(1) of the CA 2001, a director may avoid civil liability for insolvent trading if, at a particular time after they suspect that the company may become or be insolvent, they start developing one or more courses of action that are reasonably likely to lead to a better outcome for the company than liquidation (or administration). The director will not then be liable for debts incurred directly or indirectly in connection with the course or courses of action.
Actions that may attract the protection of the safe harbour as being likely to lead to a better outcome for the company are set out in section 588GA(2) of the CA 2001 and include:
- Properly informing themselves of the company's financial position.
- Taking appropriate steps to prevent any misconduct by officers or employees of the company that could adversely affect the company's ability to pay all its debts.
- Taking appropriate steps to ensure that the company is keeping appropriate financial records consistent with the size and nature of the company.
- Obtaining advice from an appropriately qualified entity who was given sufficient information to give appropriate advice.
- Developing or implementing a plan for restructuring the company to improve its financial position.
A holding company of an insolvent company may also avoid civil liability for the insolvent trading of a subsidiary under section 588V of the CA 2001 if it takes reasonable steps to ensure that section 588GA(1) of the CA 2001 applies to each of the directors of the subsidiary (and the relevant debt), and that section 588GA(1) does so apply in relation to each of the directors and the debt.
In response to the 2019 outbreak of novel coronavirus (COVID-19), federal Parliament introduced a temporary six-month "safe harbour" period in which directors were relieved from the duty to prevent insolvent trading. It was referred to as a "new safe harbour" (separate to the existing statutory safe harbour that applies under normal circumstances). The new provisions commenced on 25 March 2020 and expired on 31 December 2020. For further information on these temporary changes, see Legal update, Temporary relief from insolvent trading (COVID-19 response).
For further relevant information, see Practice notes: