NEWS & INSIGHTS
In the Beginning: The Genesis of the Safe Harbour Defence
As companies increasingly turn to the Safe Harbour provisions for rehabilitation of distressed entities, there is an increasing body of available work and commentary on the legislation, as the practical issues take shape.
The manner in which the Law developed, the associated consultative processes and the ultimate form of the legislation adopted, will be instructive as the reform agenda continues. We revisit some of the enquiries, papers and public work that gave rise to the Safe Harbour we work with today.
Business owners are naturally minded towards finding a clear and effective pathway through distress. Insolvency solutions have always been (quite appropriately) seen as a last resort and are used when either the commercial issues are beyond redemption, or the legal environment for insolvent trading presents such significant risk that failure is inevitable. The hesitation to take action is, on the part of directors due to (a) the expectation that insolvency will result in business transition, humiliation or failure, along with (b) the strict nature of insolvent trading liability.
Over the last 15 years or so, there has been a more concerted push to codify workout procedures from both a law reform and productivity standpoint. Noting the progress made, we revisit some of those below.
2010 FEDERAL GOVERNMENT DISCUSSION PAPER
A 2007 Government Paper “Review of Sanctions in Corporate Law” had canvassed whether there should be some general protection for Directors where they had acted in a bona fide manner, and Parliamentary Committees as far back at the 1980’s considered the same question.
Post the Global Financial Crisis, in January 2010, the Financial Services Minister Chris Bowen, for the Federal Government released a discussion paper entitled Insolvent Trading: A safe harbour for reorganisation attempts outside of external administration.
The paper was released given concerns expressed to government following the GFC, that laws directed at preventing insolvent trading negatively impacted on genuine work-out attempts. In particular, at paragraph 1.5 the paper notes:
“In the wake of the global financial crisis some commentators have argued that there have been significant negative impacts on the availability of credit, leading to both an increase in reorganisation attempts and increased difficulties for companies in maintaining solvency on a short-term basis while an informal work-out outside of external administration ‘work-out’ is attempted. It may be that the reduction in credit availability has precluded some companies from attempting a work-out at all when faced with the personal liability of directors for insolvent trading.”
The paper noted this impact may be responsible for a shift, in the wake of the GFC, in focus away from arguments for a broad general defence for insolvent trading, towards exploring how informal work-outs outside of administration can be promoted. Three options were proposed:
Maintaining the status quo: ensuring a company remains solvent while attempting to restructure (outside of external administration): The tension with the status quo being that the criteria used by courts in determining whether directors should be held liable, are uncertain.
The creation of a ‘Safe Harbour’: The modified business judgment rule. The business judgment rule operates as a defence to breaches of directors’ duties of care and diligence. If the rule was extended, directors may have a defence to insolvent trading where:
- financial accounts and records present a true and fair picture of financial circumstances;
- directors obtained appropriate advice on the accounts and records, from an appropriately qualified person;
- the director showed the interests of shareholders and creditors were best served by pursuing restructuring; and
- the director has diligently pursued the restructuring.
The creation of a ‘Safe Harbour’: moratorium from the insolvent trading prohibition: This option would require a company to advise the market (including creditors and) that the company is insolvent and intended to pursue a work-out outside external administration. Such a mechanism would be designed in such a way that creditors would have the final say over when the moratorium period would finish.
The moratorium proposal was regarded as suggesting introduction of US Chapter 11 bankruptcy protection provisions into Australian law, a controversial issue for some time. While that approach would allow the market to be informed, it could damage the reputation of a company by forcing it to disclose its position, instead of trying to resolve company difficulties ‘beneath the radar’.
It was considered easier for government to adopt a proposal concerning a business judgment rule for insolvent trading. This was a less radical option as the rule was already recognised as a defence to a breach of duty in Section 180 of the Act:
The 2010 Federal Government Discussion Paper provided a clear and early solution with alternative models for a Safe Harbour based on an extension of the Business Judgement Rule and an Insolvent Trading Moratorium.
2014: ARITA - A PLATFORM
FOR RECOVERY
Following a submission in response to that Paper, ARITA issued a further Discussion Paper A Platform for Recovery 2014 which examined the aims of insolvency law, and suggested frameworks for large, SME and micro-companies. A comprehensive paper, where in Section 8, ARITA supported a Safe Harbour based on extension of the Business Judgement Rule.
The 2014 ARITA Discussion Paper provided a clear perspective on restructuring initiatives recognising that different solutions were needed for entities of different sizes.
This was discussed in our recent Turnaround Podcast: John Winter, policy reform and the power of ethical advocacy.

2015: PRODUCTIVITY COMMISSION REPORT
Following this work, the Productivity Commission Inquiry Report Business Set-up, Transfer and Closure (May 2015) proposed a formal safe harbour procedure. This followed the theme, allowing directors to retain control while receiving advice about restructuring options from registered advisers. That report noted on Page 25:
“To better support early restructures, consideration should also be given to the role and responsibilities of company directors during restructuring and the incentives these create. In particular, the Commission recommends the introduction of a ‘safe harbour’ defence for directors of solvent but struggling companies, such that they would be able to undertake formal restructuring activities without liability for insolvent trading while the defence is active.
The defence would require formal (but not public) appointment of a registered restructuring adviser, and receipt of advice that is proximate to a specific circumstance of financial difficulty. Should the adviser form the view that restructure into any form of viable business or businesses is not possible, they would be under a duty to terminate the safe harbour period and recommend the commencement of a formal insolvency process.”
The lengthy enquiry Report is here: Inquiry report - Business Set-up, Transfer and Closure. Recommendation 14.2 of the Report Recommended the law be amended to allow for a safe harbour defence. The defence would be available when:
- directors of a company have made, and documented, a conscious decision to appoint a safe harbour adviser with a view to constructing a plan to turnaround the company
- the adviser was presented with proper books and records upon appointment, and can certify that the company was solvent at the time of appointment
- the adviser is registered and has at least 5 years’ experience as an insolvency and turnaround practitioner
- directors are able to demonstrate that they took all reasonable steps to pursue restructuring
- the advice must be proximate to a specific circumstance of financial difficulty, and subject to general anti-avoidance provisions to prevent repeated use of safe harbour within a short period
- The defence would not attach to any particular decision and instead would cover the running of the business and any restructuring actions from the time of appointment until the conclusion of (reasonable) implementation of the advice.
If the adviser forms the opinion that restructure into any form of viable business or businesses is not possible, they would be under a duty to terminate the safe harbour period and advise the directors that a formal insolvency process should commence. The safe harbour adviser may only be appointed in a subsequent insolvency process with leave of the court.
The 2015 Productivity Commission proposals formed much of the basis of the Safe Harbour ultimately adopted, was designed as a defence rather than an extension of the business judgement rule. We note the solvency certification proposals, and the safe harbour advisor experience provisions, and the termination provisions (around advice implementation) were not ultimately adopted.
2016 TREASURY INSOLVENCY REFORMS PROPOSALS
The Treasury National Innovation and Science Agenda – Improving bankruptcy and insolvency laws Proposals Paper: Improving bankruptcy and insolvency laws in 2016 made further proposals for improving insolvency laws. It proposed two models (A and B):
- Model A: proposed provides a defence to an alleged breach of the insolvent trading prohibition i: a reasonable director would have an expectation, based on advice provided by an appropriately experienced, qualified and informed restructuring adviser, that the company can be returned to solvency within a reasonable period of time, and the director is taking reasonable steps to ensure it does so.
- Model B: A carve out where Section 588 does not apply (a) if the debt was incurred as part of reasonable steps to maintain or return the company to solvency within a reasonable period of time; and (b) the person held the honest and reasonable belief that incurring the debt was in the best interests of the company and its creditors as a whole; and (c) incurring the debt does not materially increase the risk of serious loss to creditors.
The Government considered that the test of viability is whether the company can avoid insolvent liquidation and be returned to solvency within a reasonable period of time.
The Report is attached here: National Innovation and Science Agenda – Improving bankruptcy and insolvency laws. There were 61 submissions to the Proposal included comments on the role of the Restructuring Adviser. The support for Model A (defence) to Model B (business judgement) was divided between major sector stakeholders.
In particular, we note that the AICD C2016-017_Australian_Institute_of_Company_Directors.pdf favoured Model B, on the basis that the onus of Proof on Directors for the defence in Model A was onerous, and the Directors would be disempowered by the appointment of a Restructuring Advisor.
“ The AICD believes that a principles-based approach is preferable to such a prescriptive approach, particularly as the safe harbour must be scalable across all companies. Instead of mandating the appointment of an accredited restructuring adviser, we advocate that guidance be given on the factors that director should take into account when taking reasonable steps to turnaround a company or its viable businesses.”
The 2016 Treasury Reform Proposals established the ultimate framework (Model A) as the preferred framework for the basis of the Safe Harbour Law.
2017 EXPLANATORY MEMORANDUM
The Legislation was ultimately set out in the Explanatory Statement accompanying the 2017 Safe Harbour reforms.
The Memorandum set out the context of the amendments, as the destructive nature of administration, and at Section 1.10:
“A cornerstone of a good insolvency regime is the promotion of the efficient allocation (or reallocation) of capital. The current insolvent trading provisions however can result in the unnecessary liquidation of companies that could otherwise be successfully restructured and continue to operate. This is not in the interests of the company’s directors, employees, creditors and the economy as a whole.”
Though the legislation was intentionally broad, the Explanatory Memorandum was (pleasingly) short on detail and prescription, allowing the insolvency market to determine the practical approaches. Pursuant to Section 588HA, an independent review was required to examine and report on the operation of the safe harbour within two (2) years following the introduction of the Law.
2021: THE SAFE HARBOUR PANEL REVIEW PANEL
The requirement for the Review (and indeed, the practical implementation of the Law) was interrupted by the Covid Pandemic. In 2021, a Panel was formed to “assess whether the safe harbour is achieving its aims, including giving financially distressed but viable companies more ‘breathing space’ to restructure their affairs”. The Report is attached here: Review of the insolvent trading Safe Harbour
Wexted have reported extensively on the Safe Harbour Review:
The Turnaround Podcast: Spotlight on Safe Harbour with Michael Catchpoole | News & Insights
The Turnaround Podcast : Genevieve Sexton - Safe Harbour and are we making a difference?
The Panel made 14 recommendations, a proportion of which have been implemented as detailed in another Wexted article: Safe Harbour - Is it fit for purpose?
As we reported: "Seemingly, ground is finally now being made in the refinement of the Safe Harbour Law consistent with the findings of the Panel. For some time, Government had concerns about the extent of failure where business had not taken genuine, early and meaningful remediation steps. The duty on directors to prevent insolvency were prescriptive, even repressive and encourage liquidation as a panacea to insolvent trading liability – the result is directors can jump to that conclusion too quickly and for the wrong reasons. In our experience Safe Harbour is addressing this challenge to good effect."
Our Submission
Our submission indicated Business will require the confidence to continue to trade though strong headwinds, in a likely ambiguous environment. Governments would and should be keen to avoid significant insolvency events impacting on employment and growth. A clear pathway for distressed business to take appropriate steps towards recovery, without resorting to insolvency, has become an important step in that the broader economic debate.

2025: ASIC RG217
In December 2024 ASIC released Regulatory Guide RG 217 Duty to prevent insolvent trading: Guide for directors following recommendations from the Safe Harbour Review Panel.
The changes to RG217 are significant and a positive step in prescribing clear and strong guidance to Safe Harbour. The major changes include:
- A new Section C (RG217.73 to RG217.116) specifically addressing Safe Harbour;
- Addition of a new Table 3 in Section D (being Factors ASIC will take into account, in establishing Safe Harbour protection).
We reported on these in a recent article: Spotlight on Safe Harbour - Asic tighten up regulatory guidance.
CONCLUSION
While the legislation continues to be developed and is subject to increasing scrutiny and discussion, it is grounded in very long standing and well-established principles of corporate law, that have sought to establish a clear and well thought through alternative for directors when facing distress.
The next phase of Law Reform should begin with these same principles, many of which are well covered in the work undertaken over the last 15 years, see article Spotlight on Reform.
Published 30th July 2025

By Joseph Hayes
Partner