Australia’s safe harbour is often sold to directors as a shield – a way to take restructuring risk without inviting personal ruin. In reality, it is a dense little statute, a conditional carve-out layered on top of an already complex duty to prevent insolvent trading that is yet to be tested by the Courts.
Because there is still very little case law on the regime, the real work of interpretation is only just beginning, and the first major test case is lining up to be heard. In the absence of a checklist, the courts will need to establish some parameters around a reasonable restructuring plan and the underlying architecture for determining directors’ and their advisors’ liability.
The recent wave of collapses across large, listed companies and similarly sized family and privately owned groups is expected to drive increased testing and application of safe harbour provisions under the Corporations Act 2001 (Act). The appointed external administrators to these entities are expected to raise allegations that the groups may have been trading insolvently for an extended period prior to their failure, exposing directors to potential insolvent trading claims of significant scale. The directors, in turn, have pointed to their reliance on Safe Harbour protections (some beginning during the COVID era and continuing intermittently until the company’s voluntary administration). Whether those protections were properly enlivened, whether they were maintained without interruption, and whether the statutory pre-conditions were satisfied throughout the relevant period are now live questions in contested proceedings, reasonableness of the plan to provide a better outcome than by immediate voluntary administration or liquidation.
For the first time, Courts will be asked to give concrete meaning to a regime that has so far functioned more as a conceptual reassurance than a body of settled law.
What does it mean to “start developing” a course of action?
Safe harbour hinges on when the director “starts developing one or more courses of action” that are reasonably likely to lead to a better outcome than immediate formal insolvency. That phrase alone is fertile ground for dispute.
Key questions a court will eventually have to resolve will include:
- Timing: At what point does safe harbour “commence”? Is it when the board first informally canvasses restructuring options, when external advisers are engaged, or only once a written plan exists?
- Formality: Must there be a defined safe harbour “plan” document, or can a constellation of board papers, emails and cashflow models amount to “developing a course of action”?
- Continuity: If the plan evolves materially over time, is this a single continuing course of action or a series of separate ones – with protection potentially lapsing in between?
How the Courts answer these questions will determine whether safe harbour is a narrow, technical defence or a more flexible standard that recognises the original intent of the legislation and the pivot like nature of real-world turnarounds.
The core ambiguity: “reasonably likely” and the “better outcome” test
In my opinion as practitioner in the safe harbour area, the central interpretive challenge is to establish what it means to create a course of action “reasonably likely to lead to a better outcome for the company” than immediate administration or liquidation.
There are at least four embedded questions which I think the Courts need to consider:
- Ex ante vs ex post: Is “reasonably likely” judged on what was known at the time (an ex ante standard similar to the business judgment rule), or do Courts permit a degree of hindsight when weighing whether the plan ever had a real prospect of success?
- Probability threshold: Does “reasonably likely” mean “more probable than not”, or something lower – e.g. a real and not remote prospect? The answer will materially affect how risk averse directors will be.
- Who is the “winner” in a better outcome? The Act frames “better outcome” by reference to the company, but insolvency principles create fiduciary duties which put directors in the twilight zone to primarily protect creditor interests, while the stakeholders in a turnaround are broader than just creditors and shareholders and could be wider to customers and community. Expect arguments that, in substance, the test must be creditor-centric once insolvency is in prospect.
- Comparator problem: What exactly is the alternative? A vanilla voluntary administration? A sale of business? A piecemeal liquidation in a falling market? Safe harbour litigation will likely revolve around whose version of the “immediate appointment” scenario the court accepts. In my experience liquidation never results in a better outcome as liquidation crystallises future losses, such as employee redundancies or future rent on leased premises.
These are not mere semantics; they go to the normative orientation of the reasons in establishing the regime. A creditor-protective, hindsight-heavy reading will reduce its use. A rescue-friendly, ex ante reading will entrench safe harbour as a genuine restructuring tool, which in my opinion should be.
Eligibility conditions: hard edges or flexible thresholds?
Safe harbour is only available if certain threshold conditions are met – broadly, that employee entitlements are paid when due and tax reporting is up to date.
Interpretive pressure points include:
- Substantial vs. Perfect Compliance: How will courts treat minor or technical non-compliance (e.g. small ATO arrears or isolated superannuation underpayments)? Failing to lodge two nil BAS returns on time creates a historical record which disqualifies directors from accessing Safe Harbour protection for any new debts incurred while those two failures remain within the preceding 12 months. This disqualification applies unless a court explicitly orders otherwise under Section 588GA(6), being satisfied that the failure was due to exceptional circumstances or that the order is in the interests of justice.
- Legislative satisfaction: Is it enough that obligations are rectified during the safe harbour period, or must they be satisfied for safe harbour to be first invoked?
- Complex groups: In corporate groups, what if some entities are compliant and others are not? Does non-compliance in one part of the group infect the whole, or can safe harbour protection be compartmentalised, or ceased part way through the restructure?
Liquidators and litigation funders can be expected to attack these eligibility limbs aggressively. The more rigidly they are construed, the more scope there will be to argue that safe harbour was never validly commenced.
When does safe harbour end?
Another under-theorised area is cessation. The statute contemplates that protection falls away if the course of action stops being reasonably likely to deliver a better outcome, or if directors fail to properly inform themselves or engage with the plan or eligibility thresholds. Yet the endpoint will almost always be reconstructed after the fact. Is there time allowed between the end point when directors know a plan can no longer succeed and the appointment of an insolvency practitioner, given the time it takes to pre-plan for an appointment especially in large complex groups?
Courts will need to decide:
- Whether the protection ceases gradually (as the plan unravels) or at a discernible inflection point;
- How to map the timeline of protected and unprotected debts; and
- Whether directors are entitled to a “period of grace” to adjust course when new information emerges.
These questions go to the practical value of safe harbour as a regime that can be retrospectively switched off months earlier than directors believed, will offer little comfort in practice.
The evidential burden – how much process is enough?
Given the limited court guidance on safe harbour to date, directors are largely guided by the Corporations Act, the Explanatory Memorandum, Treasury’s 2022 review, and ASIC’s updated Regulatory Guide 217 when assessing what evidence will be required.
In litigation, expect disputes about:
- How much weight to give board minutes and adviser reports, especially where they are prepared with an eye to future proceedings;
- The role of independent expert evidence about the plausibility of the restructuring plan; and
- Whether the onus on directors is a heavy “positive defence” burden or something closer to a rebuttable presumption once a credible plan is shown.
The law’s answer here will shape boardroom behaviour. A heavy evidential burden pushes directors toward more formal, documented processes; a lighter touch may encourage more agile but less visibly robust decision-making.
The first generation of contested safe harbour cases will do more than settle technical drafting points. They will effectively choose between two models of the regime:
- A narrow defence, tightly policed on eligibility, heavily influenced by hindsight and strongly creditor-protective; or
- A genuine rescue safe harbour, assessed from the director’s vantage point in real time, focused on whether they acted in good faith to balance the interests of all stakeholders, with expert support and a plausible plan.
An appropriately qualified entity
An “appropriately qualified advisor” under Australia’s safe harbour laws is an advisor with the professional expertise, credentials, and insurance necessary to give restructuring advice that directors can reasonably rely on.
In practice, however, that simple phrase invites a series of contested questions that go well beyond mere professional titles:
- What does “appropriate” mean in context? Is appropriateness determined by formal qualifications (e.g. registered liquidator, accountant, lawyer), or by demonstrated experience in restructures of similar size and complexity? A suburban accountant may be technically qualified, but is that enough for a multi-entity, cross-border restructuring? Conversely, could a non-traditional turnaround specialist without formal insolvency accreditation still meet the standard? Courts will likely be asked to adopt a contextual, fact-sensitive approach, tying the advisor’s credentials to the nature of the company and the restructuring challenge at hand.
- Independence vs familiarity: To what extent must the advisor be independent from management? Many companies will first turn to their existing auditors, lawyers, or financial advisors, who have deep institutional knowledge but may also face conflicts or perceived bias. There is a live tension between continuity (which aids speed and judgment) and independence (which bolsters credibility in hindsight litigation). Courts may need to assess whether independence is a formal requirement, or simply one factor going to the weight of the advice.
- Scope and depth of engagement: Is it sufficient that an advisor is formally engaged, or must they actively interrogate assumptions, test downside scenarios, and challenge management forecasts? A “light-touch” engagement designed to evidence safe harbour may carry limited weight if the advisor’s role is seen as superficial. Expect scrutiny of engagement letters, work product, and the degree to which advice was iterative and responsive to changing conditions.
- Reliance – reasonable or performative? The statutory language assumes that directors do more than simply obtain advice; they must genuinely rely on it. This raises questions about the quality of interaction between board and advisor: Were difficult questions asked? Were warnings escalated and acted upon? Or was the advisor effectively used as a shield to justify a predetermined course? Courts may draw a distinction between authentic reliance and “defensive” commissioning of advice.
- Insurance, accountability and the litigation ecosystem: In large collapses, plaintiffs (including liquidators and litigation funders) are increasingly likely to target not only directors, but also their advisors. This introduces a practical dimension: will “appropriately qualified” come to imply not just expertise, but also professional indemnity insurance and a capacity to meet claims? If so, this could narrow the field to larger firms and reshape the restructuring advisory market.
- Dynamic qualification over time: As restructures evolve, so too may the need for different expertise (e.g. refinancing, operational turnaround, asset disposals). An advisor who is “appropriate” at one stage may not be sufficient later. This raises the possibility that safe harbour requires not a single appointment, but a suite of advisory inputs over time. Whether courts accept a rolling, adaptive advisory model - or instead expect continuous engagement of a consistently “appropriate” entity - remains unresolved.
Ultimately, this limb of safe harbour is likely to become a proxy for broader judgments about process and credibility. A well-qualified, genuinely engaged advisor, operating at arm’s length and producing rigorous work, strengthens the narrative that directors acted prudently in difficult circumstances. A thin or conflicted engagement, by contrast, may invite the inference that safe harbour was more form than substance.
As a practitioner and a supporter of a more robust safe harbour regime, I am not a fan of the legislature’s limited guidance leaving Courts to complete the design. How those Courts fill the gaps will determine whether safe harbour functions as a real supporting process for directors undertaking major restructuring and refinancing – or whether it remains, in practice, a comforting, ambiguous label which may not be fit for purpose.
