Insolvent Trading Safe Harbour Review

The federal government introduced the insolvent trading Safe Harbour provisions in 2017 to encourage directors to focus on options to turn around distressed companies without unnecessarily worrying about their personal liability.  The intention was to provide the company with an opportunity to restructure a fundamentally sound business.

Essentially, the Safe Harbour provisions provide a defence to company directors from claims they traded a company whilst it was insolvent, where they acknowledge the company is facing financial difficulties and they are working on a plan to save the company and its business, which will lead to a better outcome than the alternative (which would be liquidation).

The government commissioned an independent panel of experts to conduct a review of the Safe Harbour scheme between August and November 2021. The purpose of the review is to ensure the scheme remains fit for purpose and its benefits can extend to as many businesses as possible.

It is difficult to know just how many Safe Harbour appointments have been used since the provisions came into effect in 2017, as they are not formally recorded with ASIC, unlike other External Administration appointments.  Nor is it known publicly whether they have been successful or not.

Overall, the review highlighted the need to simplify and clarify the Safe Harbour provisions so they are better understood by company directors and their advisers.

The review led to fourteen (14) recommendations and the Government has announced it agrees with the majority. Some of these recommendations are set out below:

• The development of a plain English ‘best practice guide’ to Safe Harbour so it is better understood.
• That Treasury commission a ‘holistic in-depth review of Australia’s insolvency laws’ and the collection of data on the use of the scheme.
• Tighter definitions of who should be advising company directors (and/or the company) when navigating the Safe Harbour.

Most of the recommendations focus on simplifying the wording of the Safe Harbour provisions to ensure it is accessible to more company directors.

The key takeaway is that Safe Harbour plays an important role in the business environment, but some tightening up of qualifying criteria and definitions would improve its operation.  The review may also prompt a wider review of Australia’s insolvency laws, which could lead to more radical change in the insolvency and restructuring landscape.

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