Safe harbour guide for SMEs: how to navigate compliance, protection and practical steps

Summary

• A financially troubled business in Australia can utilise the safe harbour rules to develop a restructuring plan. A restructuring plan should include cost cutting and stabilisation initiatives. 
• In Australia it is illegal for companies to continue to trade if insolvent. The key exception to the prohibition on insolvent trading is where an insolvent company uses the ‘safe harbour’ legal carve-out.
• Under section 588GA of the Corporations Act, if any company director suspects insolvency and incurs debts while pursuing a course of action that is reasonably likely to lead to a better outcome for the company, the director is not liable for illegal insolvent trading. This is the safe harbour carve-out.
• Section 588G of the Corporations Act prohibits companies from trading while insolvent and provides a cause of action for liquidators against company directors.
• Insolvency is more than a temporary liquidity problem: it is a chronic shortage of working capital where the company cannot pay its debts as they fall due.
• Previously, directors had to place a company into external administration as soon as it became insolvent to avoid personal liability. This made Australia’s insolvent trading laws amongst the strictest in the world.

The Safe Harbour Provisions

In 2015 the Productivity Commission published an inquiry report recommending, among other measures, a safe harbour from insolvent trading to enable businesses to attempt a turnaround without immediate personal liability for directors. Although this recommendation helped prompt the 2017 reforms, the government’s safe harbour differs substantially from the Commission’s proposal.

• The principal change introduced in 2017 was a statutory “carve‑out” to the prohibition on insolvent trading, effectively permitting companies to continue trading while unable to pay debts in certain circumstances where previously they could not.
• Specifically, section 588GA was added to the Corporations Act 2001 (Cth) to establish a safe harbour for directors who take a course of action reasonably likely to lead to a better outcome for the company.
• Judicial consideration of the safe harbour remains limited. In Re Balmz Pty Ltd (in liquidation) [2020] VSC 652 the court found that preconditions for the safe harbour—such as being current with tax lodgements and employee entitlements—were not met and therefore declined to explore the safe harbour’s scope in detail.

 What is the safe harbour from insolvent trading?

The safe harbour is a pro-business mechanism that helps companies stay afloat by giving directors protection from prosecution for insolvent trading while they work on an informal debt restructuring. This means that companies that become insolvent can continue to trade, take out loans, and make changes aimed to restructure and revive the business, rather than immediately writing it off as a failure and instigating a formal appointment of a liquidator, small business restructuring practitioner or voluntary administrator. It recognises the need for businesses to be given a ‘second chance’ to try a different approach and address their profitability.

The safe harbour is the only carve-out to the duty of company directors to cease trading when a company is insolvent. The safe harbour from insolvent trading as it was introduced in September of 2017 represents a significant watering down of the insolvent trading prohibition and is an alternative to a formal appointment of a voluntary administrator, small business restructuring practitioner, or liquidator.      

The most widely read report in Australia that recommended a safe harbour from insolvent trading was the Productivity Commission’s Business Set-up, Transfer and Closure Report. The Productivity Commission’s recommendations, however, were not followed by the government. The Commission recommended that a registered “restructuring adviser” take control of the safe harbour process and that they follow a set process that included providing a certificate. Under the Productivity Commission model, the restructuring adviser was also required to have a deep knowledge of insolvency. Instead, the government inserted a new section 588GA into the Corporations Act 2001 (Cth) that, compared to the Productivity Commission recommendations, is vague and laissez-faire. The substantial requirements to obtain safe harbour protection include starting to “develop” a course of action for a turnaround, meeting a threshold of filing tax returns on time and paying all employee’s entitlements in full.

What is the prohibition on insolvent trading?

Prior to 2017, the law effectively mandated directors to move to external administration as soon as their company was insolvent to avoid the risk of personal liability. Under section 588G of the Corporations Act, there is a prohibition on anyone who is appointed a director of a company in Australia from continuing to trade – that is, incurring any further debt – if their company is insolvent. Insolvency means that the company is not just experiencing a temporary liquidity problem but has an endemic shortage of working capital. The company would therefore need to be unable to pay its debts as and when they fall due and payable. Section 588G is a cause of action that liquidators have against company directors after a company is placed in liquidation to recover money. 

These reforms were a dramatic departure from the previous insolvency law because previously, a director of an insolvent company would be automatically advised to make a formal appointment. This was because under the prohibition against insolvent trading there was:

• a duty to creditors; and
• if the company went into liquidation, a potential liability to pay back a lot of the debts incurred while the company was trading whilst insolvent.

This reform has changed the game for professional advisors, lawyers, and accountants because now there is a third path available: attempting to turn the business around through implementing a restructuring plan.

There is nothing specific in the legislation about the type of professional advisor required to advise the directors. This means that directors can also ‘self-help’ by developing their own plan to reach a safe harbour.

The penalties for insolvent trading in Australia are:

• Civil penalties up to $200,000
• Liability to compensate the company or relevant creditors for the amount of debt incurred as a result of the breach
• Potential criminal prosecution

The duty to prevent insolvent trading does not apply when:

• At a particular time after the director suspects insolvency, the director starts to develop a course of action that is reasonably likely to lead to a better outcome for the company; and
• The debt is incurred in connection with the course of action.

An insolvent trading claim is like a lightning strike: they are rare, but they can be dangerous if you’re unlucky enough to receive one.

It is very unlikely that a director of an SME (up to 200 employees) would face an insolvent trading action. There are no statistics on how many demands have been issued by liquidators or what proportion of liquidations involve insolvent trading claims. However, one empirical study found that there were only 63 insolvent trading judgments in Australia between the 1960s and 2004. It is a demanding and expensive exercise for a liquidator to run an insolvent trading claim, so they are usually averse to this course of action.

Sometimes, insolvent trading is a crime – a safe harbour exception

Insolvent trading is an offence under s 588G(3) of the Corporations Act, and in some cases, it may be referred to ASIC to pursue further investigation and possible criminal prosecution. In serious instances, it can incur a prison term. While civil proceedings are pursued first and more commonly to recover money, directors should be aware of the potential for insolvent trading to result in a criminal record. The safe harbour from insolvent trading will not protect directors from criminal liability. Note that for ASIC to pursue criminal charges, the insolvent trading will likely be serious and ongoing, perhaps accompanied by other wrongdoing. Civil insolvent trading claims are rare, and criminal insolvent trading proceedings are even more so. 

ASIC often fails to pursue criminal charges due to a lack of evidence (given the high standard of proof), the cost of their time spent investigating the claim and preparing material for the prosecution, the cost of the DPP’s time spent in running the prosecution and the lack of incentive, especially for smaller companies (as the directors are usually personally bankrupt themselves).

Another turnaround procedure: small business restructuring under Part 5.3B of the Corporations Act 2001 (Cth)?

When comparing Australia to the US and UK, it could be argued that Australia lacks a turnaround culture that supports businesses to restructure and resume trading after encountering financial difficulty. Linked to this culture is our lack of a turnaround profession. Incongruous and insufficient regulations have led to a prevalence of snake-oil advisors who make it difficult for SMEs to locate quality pre-insolvency or turnaround advice; it can be hard to determine if a company needs a lawyer, an accountant, or something else entirely. Note, however, that there are signs this culture is starting to change. The small business restructuring framework under the Corporations Act while only introduced in 2021, is showing some early signs of success in turning around small businesses. In small business restructuring under Part 5.3B of the Corporations Act, directors can resolve to appoint an independent restructuring practitioner (a type of insolvency practitioner) who has 20 business days to assist with developing a restructuring plan to be put to creditors. Throughout the process, the directors remain in control of the company and can continue to trade. 

While evidence of its success is still preliminary, a 2025 ASIC report found that 79% of restructuring plans were accepted by creditors. It must be noted, again, that this is only preliminary evidence of the success of small business restructuring as a turnaround process. It is possible that some of these businesses subsequently liquidated, or will do so in the future. Nevertheless, signs are promising.       

Developing a plan under the safe harbour

The Turnaround Management Association (TMA) lists six distinct stages in the turnaround process. Movement through these stages can be cited (or a documented plan to do so) as evidence that the business has ‘developed a plan’ in line with the requirements for the safe harbour. Note that compliance will require regard to be had to the plan that a company develops or implements “to improve its financial position” (s588GA(2)(e)). 

Stage 1 – Change in management

Some or all of the incumbent management are likely part of the issues the business is facing. In order to execute an effective turnaround, managers need perspective, credibility, knowledge and an open mind. During this stage, it is important to revitalise the management team where necessary in order to give a turnaround the best chance of ongoing success.

Stage 2 – Analysing the situation

This is the most important step in a turnaround and goes to the ‘developing a plan’ aspect required to gain protection through the safe harbour from insolvent trading. The business’ chances of survival must be identified, along with appropriate financial tactics that form a preliminary action plan.

Ask: is the company at an immediate risk of failure, or does it have substantial losses but its survival is not yet threatened? Alternatively, is there merely a declining business position?

There are three key requirements for viability: a sustainable core business, adequate financing and sufficient organisational resources.

Strengths and weaknesses should then be assessed throughout all areas of the business while the turnaround professional deals with the various stakeholders and keeps them up to date.

Once key issues are identified, a strategic plan with specific goals and detailed functional actions can be developed. This plan may need to be ‘sold’ to all key stakeholders within and surrounding the company in order to restore confidence.

Stage 3 – Emergency Action Plan

While a long-term recovery plan is developed, immediate life‑saving actions are essential. Short‑term steps may include targeted layoffs, consolidating or eliminating non‑core product lines, pausing or cancelling non-essential product development, and liquidating excess inventory. These difficult decisions should be taken quickly and communicated clearly to minimize uncertainty and stress. When a business faces severe financial distress, cost reduction is often unavoidable, but applying a documented safe harbour approach—demonstrating good‑faith efforts to restructure and preserve value—can help protect directors and the company during the turnaround.

Stage 4 – Reorganise and restructure the business

Once immediate, short-term threats have been addressed, focus shifts to making the business efficient and sustainable. The ultimate objective should be to increase profitability and improve returns on assets and equity, while carefully managing the mix of people and skills required to support the recovery.

During this phase, a company may rely on the safe harbour protection from insolvent trading to incur  necessary debts and undertake restructuring actions. Using the safe harbour framework correctly can provide breathing space to execute a viable turnaround plan without triggering personal liability for directors, provided the statutory conditions and best-practice requirements are met.

Stage 5 – Return to normal operating

This stage represents a sustainable, controlled breath of relief and a move into a safe harbour: not a return to old, risky habits but a disciplined transition to maintenance and long-term resilience. Businesses should cautiously increase marketing, explore targeted opportunities to boost revenue, and shift focus from short-term cash flow to strengthening the balance sheet through strategic accounting, robust quality management systems, and clear governance practices.

A simultaneous psychological shift is essential to rebuild momentum and morale after difficult times. Prioritizing stability, transparent communication, and incremental wins—helps key staff regain confidence and sustain progress into the future.

Stage 6 – Judging success or failure

This will look different for every business. Sometimes, success can be embodied in a sale of the business, or even in a graceful and value-securing liquidation, conducted efficiently and without undue conflict. For some businesses, it will mean a return to trade under different terms. What is most important is to reflect on how business practices can be improved in the future to avoid the requirement for a turnaround through better business planning.

Plan tactics: cost-cutting and stabilisation

The safe harbour is essentially a short-term solution. So, any safe harbour plan must seek to achieve short-term outcomes, which in turn will then allow the company time to pursue longer-term initiatives for a restructure. To distil the above, the two key attributes of any successful safe harbour plan must be cost-cutting and achieving stabilisation. Costs must be cut in the short term to address the immediate solvency issues, as increasing sales are unlikely to occur during this time of volatility. This will likely involve firing staff; this should be done quickly rather than gradually, to see immediate returns and focus on rebuilding morale. Stabilisation should be the main goal of the plan before any transformative restructure is to occur. Stabilisation can involve reviewing management, suppliers and working capital so that they are on an even keel, providing the best possible foundation for a turnaround strategy later on.

Implementing a plan

In contrast to the US Chapter 11 requirements, in Australia directors do not need to go to court to get safe harbour protection at law. Section 588GA states that the safe harbour starts when the company directors start to develop a course of action (i.e. a restructuring plan). Section 588GA provides that the plan does not need to be finally executed but directors will need some evidence of what they have done, for example a written plan or meeting minutes of what is being proposed. Although there is no case law to support this view (yet) the evidence will need to include financial calculations to support the actions proposed. 

To claim protection under the safe harbour, there is no requirement that a director actually execute a turnaround plan. The obligation upon a director is to start to “develop” a course (or courses) of action that is “reasonably likely to lead to a better outcome for the company.” The first consideration is that the onus is quite low, given that the alternative could involve the extinguishment of goodwill in a business and a fire sale of assets through a liquidation or voluntary administration. The second consideration is that the best outcome may be an ordinary liquidation or sale of assets and that while this is being undertaken, a director can legitimately claim the safe harbour. The key test to be considered is whether the course of action developed may be “reasonably likely to lead to a better outcome for the company.” A “better outcome” is compared to what would occur if there was to be an immediate appointment of a voluntary administrator or liquidator over the company. Critically, under the new safe harbour provision there is no penalty for directors utilising assets, while in the safe harbour that would have been available to satisfy creditor claims had a liquidator or voluntary administrator been appointed. One opponent of the safe harbour has also argued that it could shield directors while they undertake phoenix activity. The problem with that view is that it is not forseeable that any court would find that asset stripping (i.e. phoenix activity) would constitute a restructuring plan affording the directors safe harbour protection. 

For the purposes of finding a course of action that is likely to lead to a better outcome for the company, regard is had to whether the director:

• Informs themselves about the company’s financial position
• Takes steps to prevent misconduct by officers or employees
• Keeps appropriate books and records
• Obtains advice from an appropriately qualified entity
• Develops or implements a plan to improve the company’s financial position

Compared to the insolvent trading regime that it reforms the new safe harbour is designed to reward thoughtful company directors who make sensible records and document their actions. The bottom line is that company directors will need to be confident they could front a court and explain how their actions improved the company’s financial position (in the lead up to its ultimate liquidation). 

The law provide that any ‘appropriately qualified’ entity, being a lawyer, accountant or a consultant is able to advise a company on safe habour restructuring. The controversy in this is that the scope of this Corporations Act provision is vague and there is uncertainty about whether the ‘appropriately qualified’ entity bears risk if they do not provide accurate or appropriate advice to a director. For example, do lawyers provide that advice in their capacity as a lawyer or as a consultant? There is no requirement that it has to be in their capacity as a lawyer given the bottom line is that the company’s financial position needs to be likely to be improved.  

It is the role of an insolvency lawyer to consider:

• the personal risk to the directors;
• the structure of the business;
• whether there can be a restructure put in place; and
• working with other stakeholders.

If a company director is utilising the safe harbour provisions, there is no legal requirement that they inform their creditors. Disclosing that a company has put itself in a safe harbour process may result in their debts being called in by creditors so it is not likely any company would publicly announce they are both insolvent and working on a safe harbour restructuring process.

The only company to disclose that they were in the safe harbour, was a mining company in 2018 and this was generally held by the industry to be a mistake as they had informed the ASX that they were in the safe harbour which was in turn made publicly available.

Qualifications of solicitors to be an “appropriately qualified entity”

One of the indicators of whether a director has a claim for safe harbour protection is whether they have obtained advice from an “appropriately qualified entity” (section 588GA(2)(d)). There isn’t much guidance on who this person may be but it certainly includes solicitors. The Explanatory Memorandum (Treasury Laws Amendment (2017 Enterprise Incentives No 2 Bill) explains:

“The factors in subsection 588GA(2) therefore provide only a guide as to the steps a director may consider or take depending on the circumstances. For example, a small business may only need to seek the advice of an accountant, lawyer or another professional, while a large listed entity might retain an entire team of turnaround specialists, insolvency practitioners, and law and accounting firms to advise on a reasonable course of action.”

The conclusion, certainly, is that an experienced solicitor may be an “appropriately qualified entity” to advise SME directors on safe harbour protection.

However, solicitors are not the only individuals qualified to assist SME directors on safe harbour protections and genuine turnaround effects. The TMA is the Australian chapter of a global association which is committed to promoting the benefits of legal restructuring to the economy. They have a diverse mix of members, including chief restructuring officers and turnaround practitioners, a host of professionals such as accountants, advisors, consultants and lawyers as well as financial advisors, lenders, investors and academics. TMA Australia members are actively engaged in financial and operational restructuring or provide ancillary professional advice. SME directors may be able to consult the TMA website and use their services to find an ‘appropriately qualified person’ suited to their business’ needs in utilising the safe harbour.      

Case study: Condor Blanco Mines’ disclosure to ASX

Condor Blanco Mines Limited was an Australian public company established in 2010. It was listed on the ASX in February 2011. A series of fraudulent management decisions led to Condor Blanco Mines being suspended from the ASX in 2016 for illegal share issues. 

In November 2017, Condor Blanco Mines made an ASX announcement that they had adopted safe harbour status.  Ultimately, Condor Blanco Mines was delisted by the ASX in 2018, likely the result of a range of systemic issues within the company, but certainly not helped by their unnecessary disclosure.

Following the Condor Blanco Mines Disclosure, the ASX re-issued Guidance Note 08, clarifying that safe harbour status was exempted from continuous disclosure rules and that companies do not need to disclose to anyone that they are attempting a safe harbour restructure. The lesson from the Condor Blanco Mines case is to keep your cards close if you decide to utilise the safe harbour – it is essentially a provision which enables companies to buy time to restructure, and this is likely voided if everyone knows the company is in trouble. 

Case study: why didn’t Virgin Airlines Australia use the safe harbour to restructure?

Virgin Australia called in voluntary administrators on 20 April 2020 after experiencing severe declines in business due to international travel restrictions put in place to halt the spread of COVID-19. Deloitte’s report revealed that the company was insolvent for a month before the voluntary administration was commenced, however, and that coincides with commencement of the Australian COVID-19 lockdown. The business was ultimately sold to Bain Capital after around 8 weeks of the voluntary administration commencing.

It is difficult to determine exactly why Virgin did not make good use of the safe harbour provisions, but the likely answer is that they simply did not have enough time. Insolvency is a volatile spiral, and the more directors delay, the more money is lost. The uncertainty surrounding the pandemic in terms of its duration would have made it virtually impossible for Virgin to make accurate financial projections. Using the safe harbour would have eaten into cash at bank to wages for staff and it is unlikely that the general body of unsecured creditors would have been supportive. Before COVID-19 Virgin was already encumbered with significant debt (~$2.3B secured lenders and ~$2B unsecured bond holders amongst the creditor body). There was no other way for Virgin to possibly obtain the debt forgiveness needed without undergoing voluntary administration. Ultimately, it appears that given the climate of uncertainty, directors (potentially with skin in the game) decided that the best returns would be obtained through voluntary administration rather than a safe harbour restructure.

The hurdles to obtaining the safe harbour provisions

The main hurdles in section 588GA for a company to obtain safe harbour protection are:

(1) all employee entitlements of the company need to be paid as they fall due; and
(2) all of the company’s tax returns need to be filed.

In the small to medium-sized enterprise space, when a company is approaching insolvency they often make the following mistakes (believing it will give the directors breathing room to delay collapse):

• stop preparing their tax returns;
• engage in creative accounting; and
• stop paying their superannuation or other employee entitlements.

If a company is not able to ensure that they are compliant with those requirements (as was the case in Re Balmz Pty Ltd (in liquidation) [2020] VSC 652), then they cannot take advantage of the safe harbour provisions. It is easier for large companies to comply with the hurdles because they have better processes and accounting support.

Phoenix activity is not safe harbour restructuring

There is no definition in the Corporations Act 2001 of what phoenix activity is and there are no specific prohibitions on it (although there are related provisions concerning creditor-defeating dispositions and various clawbacks available that target asset stripping).

One of the main characteristics of phoenix activity is that companies do not remit their taxes to the Australian Tax Office. If you examine the affairs of a phoenix company, one of the issues is that the debts are left in one entity and the assets are transferred to another without any appropriate consideration being paid. This sort of activity would  not necessarily mean that the company will fall short of one of the two hurdles in section 588GA. However, it is forseeable that any court would dismiss a director’s safe harbour claims if there was any form of asset stripping undertaken whilst their company was insolvent.

Alternatives to the safe harbour provisions

The principal approach to deal with corporate insolvency since 1993 has been to require insolvent companies in Australia to appoint a voluntary administrator. The safe harbour provisions were intended to provide companies with an alternative to such a formal insolvency appointment. A 2021 review of the safe harbour provisions, overseen by the Treasury, suggested that there has been apparently little use of the safe harbour by companies in difficulty. In that review the lack of ASIC guidance on the matter was suggested as a reason why many directors are not aware of it. Furthermore, the lack of substantive judicial guidance on its use (so far) has led to uncertainty as to how the safe habour should be applied.                

The reality is there is a low chance that a director will be sued for insolvent trading, especially in a small to medium-sized enterprise. In fact, it has been said that you have a greater chance in Australia of being bitten by a shark in George Street than being sued for insolvent trading.

One empirical study, Insolvent Trading – an empirical study conducted by Paul James, Professor Ian Ramsay and Polat Siva found that there were only 63 insolvent trading judgments in Australia between the 1960s and 2004. For a liquidator to run an insolvent trading claim, it is a demanding and expensive exercise so they are usually averse to this course. The empirical findings bear out that assessment. 

On the other hand, there are many reasons why company directors would be legally compliant and look to utilise the safe harbour provisions. Professional directors, without skin in their companies, have little financial incentive to act illegally in their capacity as independant directors. Further, if a company is insolvent on a balance sheet test (i.e. its debts > assets) there is a fair chance that the directors could utilise put forward a deed of company arrangement that would give them a fair chance (say 20%) of restructuring their company quickly, whereas procrastination offers no tangible benefits to anybody. 

Safe Harbour Summarised

Section 588GA creates a “safe harbour” for company directors: if a director, believing the company is insolvent, begins to develop and implement a restructuring plan that has a real prospect of improving the company’s position compared with immediate formal insolvency, the director will be protected from liability for insolvent trading while pursuing that plan.

The reforms were introduced because the previous strict prohibition on trading while insolvent discouraged directors from taking reasonable steps to pursue informal workouts or turnarounds as alternatives to formal insolvency processes.

These protections apply to both large and small companies, noting that in smaller businesses the owner is often also a director, whereas larger companies more commonly have independent directors overseeing decisions.

A significant downside is that a proposed turnaround may fail: if the plan reduces asset values or worsens the company’s financial position, creditors could be left worse off than they would have been if the company had entered liquidation, voluntary administration, or another formal restructuring immediately. The key qualification, however, is that directors would need to prove to a court that their course of action was prospectively “reasonably likely to lead to a better outcome for the company” and that any debts incurred were “in connection with any such course of action”. 

Directors relying on the safe harbour should therefore document their decision-making and the reasonable steps taken to develop and implement the plan, balancing the potential benefits of rescue against the risks to creditors.

How does our system compare to Chapter 11 of the US Bankruptcy Code?

The foundation of the Australian insolvency regime is that independent experts are appointed as liquidators, restructuring practitioners, voluntary administrators or receivers to insolvent companies. Under Chapter 11 in the USA, there is a debtor-in-possession regime where, with court approval, the managers of companies remain in control of the company while having the benefit of a moratorium from creditor action. These are classified as creditor-in-possession  (i.e. Australia) versus debtor-in-possession (i.e. USA) insolvency regimes. The safe harbour is a step towards a debtor-in-possession insolvency regime because directors can continue to trade during insolvency while undertaking a turnaround process. However, unlike Chapter 11, there is no moratorium on the enforcement of creditor claims. For that moratorium, directors would need to institute a formal insolvency process such as small business restructuring or voluntary administration.

Note: the term ‘safe harbour’ as it is used in this article and in Australia is not used in the US in this way – in the US, ‘safe harbour’ provisions protect defendants from anti-avoidance suits.

How does our system compare to the UK and ‘wrongful trading’?

Wrongful trading is the UK equivalent to the prohibition on insolvent trading. It complements the concept of fraudulent trading, and requires no finding of ‘intent to defraud’, thus making it an easier burden to satisfy. 

Wrongful trading is taken to occur when directors of a company continue to trade past a point when they knew or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation, and did not take every step with a view to minimising the potential loss to the company’s creditors. A wrongful trading claim can only be brought by a liquidator once an insolvent liquidation has commenced. Wrongful trading claims can be brought against de jure, de facto and shadow directors. 

In order to establish liability, the liquidator must show on the balance of probabilities that directors continued trading beyond a point when they knew or ought to have known that insolvent liquidation was inevitable.

However, it is not an offence to simply trade a company while it is insolvent. If the directors genuinely believe that the company and creditors’ position may improve, it is considered correct to trade while insolvent. This will become wrongful trading only when it should have been realised by directors that the position was likely to deteriorate and the company would proceed into liquidation. 

UK law has a ‘blue sky’ defence which provides that if the directors, in good faith, believed that the company had good prospects of improvement, they will not be held liable for wrongful trading. Liability only attaches when the company has no realistic prospects of avoiding a liquidation. It is similar to the ‘business judgment rule’ defence to the director’s duty to provide care and diligence in s 180 of the Corporations Act in Australia in that it relies on good faith in determining the validity of a director’s actions. It is the UK’s answer to a ‘safe harbour’ but operates quite differently. 

Capstone comment: Is utilising the safe harbour tactical for SMEs?

It is unlikely that a safe harbour turnaround will be tactical for SMEs. Loans substantial enough to save a business will be difficult to obtain on decent terms if a business is insolvent and incurring further debts to existing suppliers will sour relationships and not address core business issues. An attempted turnaround under the safe harbour may just increase the level of debt for SMES without fixing any of the root cause problems. SMEs should seek the advice of a professional adviser experienced in dealing with small businesses if they are insolvent or approaching insolvency. In many cases, the small business restructuring process will be more appropriate (as long as the debt is not higher than $1 million). The second issue is that a safe harbour may be too expensive for SMEs given the requirement to document the restructuring plan and take control of the company’s finances.