The Safe Harbour Review – is it providing shelter from the storm?

The “Safe Harbour” regime, contained within sections 588GA to 588H of the Corporations Act 2001 (Cth), protects company directors from personal liability for insolvent trading if the company is undertaking a legitimate restructure which is likely to result in a better outcome for the company.

Before the Safe Harbour regime was introduced in September 2017, Australia imposed some of the strictest insolvent trading prohibitions in the world on company directors. Directors were effectively required to move to external administration as soon as the company was becoming insolvent to avoid risk of personal liability.

There was to be an independent review of the operation of the Safe Harbour provisions after two years. The Covid‑19 pandemic delayed the commencement of the review.

The review commenced in August 2021, with a Panel comprised of Genevieve Sexton as Chairperson, along with Leanne Chasser and Stephen Parbery. The Panel received submissions from stakeholders. It considered the impacts of the Safe Harbour regime on directors of various sized businesses, the interests of creditors and employees and the role of advisers.

On 24 March 2022, the Government tabled the Panel’s Review of the insolvent trading safe harbour - Final report, making 14 recommendations.

The Government also released its Response to the review, largely indicating its support for the recommendations.

The key takeaway from the recommendations is that the Safe Harbour plays an important role in Australia’s insolvency regime, but that revising some provisions would improve their operation.

For example, one recommendation is that s 588GA(1)(a) be amended to include a reference to a person starting to suspect the company is in financial distress (in addition, and as an alternative to, a person starting to suspect that the company may become or be insolvent). This means that directors will not need to have a nuanced understanding of the distinction between financial distress and insolvency to trigger the protection.

Another recommendation is that the Treasury department, in consultation with Industry Groups develop a plain English “best practice guide” to better assist directors and advisors understand the regime.

How soon after the federal election any incoming Government introduces legislation giving effect to these recommendations remains to be seen.