NEWS & INSIGHTS
Not for Profits: Insolvent Trading and the Safe Harbour regime
It has been nearly 8 years since the Safe Harbour regime was introduced into the Corporations Act 2001 (Corporations Act), and the 2021 Safe Harbour Panel Review identified that there remained a general lack of awareness and understanding about:
- A director’s duty to prevent insolvent trading; and
- The protections of the Safe Harbour regime afforded to directors.
These elements, in part, have contributed to some directors not more readily engaging with the Safe Harbour provisions, in particular directors of Not For Profit (NFP) organisations. In this article we explore the interplay between the duty to prevent trading an organisation whilst it is insolvent, the protections of the Safe Harbour regime, and Australia’s NFP sector.
The NFP SECTOR
Australia’s Not-For-Profit (NFP) sector comprises approximately 600,000 organisations, which:
- Employ approximately 1.4m people, representing 10-11% of the workforce — this is comparable to the Australian retail sector; and
- Generates approximately $220bn in revenue, representing 7.8% of Gross Domestic Product — this is comparable to the Australian construction sector.
On the above measures alone, the NFP sector is a significant and important sector in the Australian economy, and is not immune to experiencing the economic, financial, and trading (operating) challenges many other sectors and organisations are currently experiencing in the Australian economy. In particular, NFPs have been required to address the following:
- The withdrawal post-covid of Government economic stimulus programs and grants;
- The focus by Government (Local, State, and Commonwealth) to manage expenditure spending growth;
- Workforce shortages and constraints;
- Wage growth, most notably in the Aged Care, and Childcare sectors; and
- Inflationary cost pressures, and the cost of living consequential impacts on donations and philanthropic giving.
In addition, there are significant reforms forthcoming for Aged Care, and the NDIS sectors that will impact on service delivery, financial sustainability, and governance.
These above-mentioned factors make it increasingly important that directors of NFP organisations are aware of:
- Their statutory and fiduciary duty to prevent an organisation from trading/operating whilst it is insolvent; and
- The Safe Harbour regime that provides a legal protection to directors from personal liability for insolvent trading whilst actively working to restructure/turnaround an organisation.
THE CHALLENGE FOR DIRECTORS OF NFPs
In its submission to the Safe Harbour Panel Review, the Australian Institute of Company Directors, and the Business Council of Australia commented as follows:
- There was a patchwork of State, Territory, and Commonwealth legislation that was relevant to the governance of the NFP sector, in particular the obligation to prevent insolvent trading/operating
- The application of legislation varied depending on whether a NFP was an incorporated association under a State or Territory, or whether it was a company limited by guarantee and subject to the Corporations Act 2001
- The Australian Charities and Not-For-Profits Commission’s (ACNC) ‘Governance Standard 5: Duties of responsible people’ also imposed governance obligations, including the duty not to operate whilst insolvent
- It was unclear how Safe Harbour applied to NFP directors due to the differences in legislative regimes, and the ACNC standards
There are approximately 60,000 organisations registered with the ACNC, of which Incorporated Associations are the most common, followed by Companies Limited by Guarantee. There are also a significant number of Aboriginal and Torres Strait Islander Corporations.
The challenge for directors or members of the committee of management for each of these types of entities, is understanding whether they have a duty to prevent insolvent trading/operating, and whether or not the Safe Harbour protection regime extends to their roles as directors or as committee members.
THE LEGAL ENVIRONMENT FOR NFPs
As previously mentioned, directors and NFP organisations have a variety of legislation and regulatory policies that set governance standards.
INCORPORATED ASSOCIATIONS
Unlike the Commonwealth’s Corporations Act which governs companies and directors’ duties across Australia, Incorporated Associations and its committee members are instead governed by specific State and Territory legislation. Section 5F of the Corporations Act specifically states that corporation’s legislation does not apply to matters declared by a State or Territory to be an excluded matter.
This means the rules governing Incorporated Associations will vary depending on the location an Association is incorporated as per below:
| State | Legislation | Insolvency Definition | Duty to prevent insolvent trading | Safe Harbour Regime |
| QLD | Assoc. Incorpor- ations Act 1981 | No specific definition | Under section 701 it is an offence for a member of the management of committee if the association was insolvent at the time the debt was incurred, or becomes insolvent by incurring that debt, and there were reasonable grounds to expect that the association was insolvent. | Section 1B declares an association to be an excluded matter under section 5F of the Corporations Act. Whilst sections 89 and 90 incorporates Part 5.3A, Part 5.5 and Part 5.6 of the Corporations Act, it does not specifically mention Part 5.7. Instead Part 5.7 is defined as a prescribed provision under section 91B in circumstances only where an association is Wound Up by the Supreme Court. As section 588GA (Safe Harbour) falls within Part 5.7B of the Corporations Act: Wexted Advisors believe that committee members can avail themselves of the protection of Safe Harbour, in circumstances where an association is Wound Up by the Supreme Court, but not a Voluntary Winding Up. |
| NSW | Assoc. Incorpo- ration Act 2009 | No specific definition | Under section 68 it is an offence for a committee member to allow an association to incur a debt if there are reasonable grounds the association is, or will become insolvent. | Whilst section 64 incorporates Part 5.5 and Part 5.6 of the Corporations Act, it does not specifically mention Part 5.7. Instead, section 95 which declares an association to be an excluded matter under section 5F of the Corporations Act, does not extend to Part 5.7 [section 95(g)(iii)]. As section 588GA (Safe Harbour) falls within Part 5.7B of the Corporations Act: Wexted Advisors believe that committee members can avail themselves of the protection of Safe Harbour.
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| VIC | Assoc. Incorpor- ation Reform Act 2012 | Insolvent means that the incorporated association is unable to pay all its debts as when they become due and payable. | Under section 152, an incorporated association that is insolvent is declared to be an applied Corporations matter in relation to the provisions of Part 5.7B of the Corporations Act. Accordingly, the duty to prevent insolvent trading under Section 588G of the Corporations Act applies to committee members of an incorporated association. | As section 588GA (Safe Harbour) falls within Part 5.7B of the Corporations Act: Wexted Advisors believe that committee members can avail themselves of the protection of Safe Harbour. |
Notwithstanding the above legislative summary of the duty to prevent insolvent trading, members of a committee of management should be aware that they may still have a common law fiduciary duty to prevent trading/operating whilst insolvent.
In this regard, Wexted Advisors believe that the use of the Safe Harbour regime could provide committee members with a reasonable defence to an insolvent trading claim whilst undertaking a meaningful restructure/turnaround.
Companies Limited by Guarantee
Companies limited by guarantee are governed by the Corporations Act. However, pursuant to section 111L, the director’s duty provisions of sections 180 to 183, and 185 do not apply to a body corporate registered under the ACNC Act. Directors in these circumstances may still have a common law fiduciary directors’ duties.
Furthermore, the exclusion provisions do not apply to section 588G a ‘Director’s duty to prevent insolvent trading by company’. Accordingly, directors of companies limited by guarantee in the NFP sector should be cognisant of their duty to prevent insolvent trading.
Most importantly, this duty imposes the higher threshold of mere suspicion by placing the onus on directors to act where “there are reasonable grounds for suspecting that the company is insolvent, or would so become insolvent.”
Wexted Advisors believe that the Safe Harbour regime applies to companies limited by guarantee, including those registered with the ACNC.
With the higher threshold of insolvent trading being the mere suspicion, directors ought to be conscious of utilising the Safe Harbour regime as part of any meaningful restructure / turnaround program for their organisations.
Aboriginal and Torres Strait Islander Corporations
The Corporations (Aboriginal and Torres Strait Islander) Act 2006 (CATSI Act) governs Aboriginal and Torres Strait Islander Corporations.
Section 694-80 of the CATSI Act defines solvency and insolvency as per the Corporations Act definition contained in section 95A:
- Solvent – A person is solvent if, and only if, the person is able to pay all the person’s debts, as and when they become due and payable.
- Insolvent – A person who is not solvent is insolvent.
Part 11-6 and section 531-1 of the CATSI Act imposes on directors of Aboriginal and Torres Strait Islander Corporations the obligation imposed by section 588G of the Corporations Act not to incur debts, make distributions to members, or enter into uncommercial transactions when the corporation is insolvent. This includes incorporating Division 3 of Part 5.7 of the Corporations Act, which includes the section 588GA Safe Harbour regime.
Accordingly, Wexted Advisors believe that the Safe Harbour regime applies to Aboriginal and Torres Strait Islander Corporations, including those registered with the ACNC.
The ACNC
The ACNC has a set of Governance Standards that applies to all organisations on its register. Therefore, in the event that the State legislation, nor the Corporations Act, nor the CATSI act applies to your organisation, and you are registered on the ACNC, your organisation will be captured by the ACNC's Governance Standards.
Of particular relevance is Governance Standard 5 which imposes a duty on ‘Responsible People’ not to allow the charity to operate while it is insolvent. Directors and committee members should be conscious that this is a broader definition, and is not limited to the active trading of an organisation.
Whilst the ACNC provides a list of warning signs for insolvency, recommendations of steps to guard against insolvency, and steps to undertake if a charity organisation is facing insolvency, it is silent on the availability of the Safe Harbour regime.
In circumstances where an organisation does not have specific legislative mention of access to the Safe Harbour regime, we believe that the use of the Safe Harbour regime could provide directors and committee members with a reasonable defence to an insolvent trading claim whilst undertaking a meaningful restructure / turnaround.
Conclusion and Recommendation
NFPs play an important role in the Australian economy, and the failure of a NFP can have a devastating impact on its clientele and local communities. Directors and committee members of NFPs are required to navigate differing State, Territory, Commonwealth, and regulatory (ACNC) governance regimes that impose duties and consequences on them, such as the duty to prevent insolvent trading.
It is clear from the independent panel review on Safe Harbour that there remains a general lack of awareness and understanding of the duty to prevent insolvent trading/operating, particularly in the NFP sector. As a consequence, there is an even further lack of appreciation of the ability to utilise the Safe Harbour regime to protect directors and committee members from the consequences of insolvent trading whilst an organisation undertakes a meaningful restructure/turnaround process.
Wexted Advisors believes that the following can be undertaken to improve the NFP sector’s awareness in relation to these concepts, namely:
1. Codify State and Territory legislation for Incorporated Associations to achieve:
- Consistent definitions of solvency and insolvency;
- Impose a consistent duty to prevent trading/operating whilst insolvent tailored for NFPs; and
- Incorporate the section 588GA Safe Harbour regime to avoid any doubt of its availability.
2. The Australian Securities and Investments Commission (ASIC), the ACNC, and the relevant state body responsible for associations should release a joint warning paper to directors and committee of management members on their duty in relation to insolvent trading; and
3. The ASIC, the ACNC, and the relevant state body responsible for associations should release a joint advice paper to educate directors and committee of management members on their ability to utilise the Safe Harbour regime.
Published 30th July 2025
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