Safe Harbour: How Directors Can Legally Keep Trading Through Financial Difficulty

Mon, 17 Aug 2026 16:16:50 +1000

Safe Harbour: How Directors Can Legally Keep Trading Through Financial Difficulty

Directors have a legal duty to prevent a company from trading while insolvent, and breaching that duty can result in personal liability for debts incurred during the insolvent trading period. Safe harbour provisions offer a specific, legally recognised protection for directors who are genuinely working toward a better outcome for the company, rather than simply continuing to trade and hoping the problem resolves itself.

The Problem Safe Harbour Was Designed to Solve

Without safe harbour, a director facing a genuinely difficult trading period has faced a difficult choice: stop trading and potentially appoint an administrator or liquidator prematurely (even where the business might have been salvageable), or continue trading and risk personal liability if the company is later found to have been insolvent during that period. This created pressure toward premature external administration, sometimes destroying value that could have been preserved with a genuine restructuring effort.

Safe harbour exists to give directors room to attempt a genuine turnaround, without the constant threat of personal liability hanging over every trading decision made during that period.

What Safe Harbour Actually Protects

If the conditions are met, safe harbour protects a director from personal liability for debts incurred during a period where the director was developing and implementing a course of action reasonably likely to lead to a better outcome for the company than immediate administration or liquidation.

This is a conditional protection — it doesn't apply automatically simply because a director believes they're doing their best. Specific requirements need to be met and maintained throughout the relevant period.

The Conditions That Must Be Met

A genuine course of action must be developed, reasonably likely to lead to a better outcome than immediate insolvency appointment — not simply continuing to trade with a vague hope things will improve.

The company must be keeping appropriate financial records, since safe harbour explicitly requires the company to be complying with its obligation to keep books and records that would allow its financial position to be properly understood.

Employee entitlements generally need to be being paid on time, since falling behind on employee wages and entitlements during the safe harbour period is treated as a significant negative factor.

Tax reporting obligations generally need to be met, tying back into the broader theme that safe harbour protects directors who are being transparent and compliant while working through difficulty — not directors who have also stopped meeting basic reporting obligations.

Appropriate advice should generally be obtained, from a suitably qualified adviser regarding the course of action being pursued, since courts and any subsequent review will look at whether the director's actions were genuinely informed and reasonable.

Why This Isn't a Free Pass

Safe harbour protection can be lost if the director stops meeting these conditions during the relevant period — it's not a one-time qualification that locks in protection regardless of what happens afterward. If a director stops paying employee entitlements, stops meeting tax obligations, or abandons the genuine restructuring effort in favour of simply continuing to trade without a real plan, the safe harbour protection can cease to apply from that point.

Common Misunderstandings

Assuming safe harbour applies automatically during any difficult trading period — it requires an active, documented course of action, not just continuing to operate as normal while hoping things improve.

Not obtaining appropriate professional advice early enough, which undermines the ability to demonstrate the course of action was genuinely reasonable and informed.

Letting employee entitlements or tax obligations lapse while focused on other aspects of a turnaround, not realising this specifically jeopardises the safe harbour protection itself.

Treating safe harbour as a way to delay an inevitable administration, rather than as protection for a genuine, well-supported attempt at a better outcome — courts and regulators can distinguish between the two.

What Directors Facing Financial Difficulty Should Do

Engage a qualified restructuring or insolvency adviser early, before the situation deteriorates further, to help develop and document a genuine course of action.

Ensure financial records are current and accurate, since this is an explicit condition of the protection, not a background assumption.

Prioritise employee entitlements and tax reporting obligations throughout the period, even while managing broader financial pressure.

Document the reasoning behind the chosen course of action, including the advice received and why it was considered reasonably likely to produce a better outcome.

Reassess regularly, since safe harbour protection depends on an ongoing genuine effort, not a single decision made at the outset.

Understand Your Protection Before You Need It

If your business is facing genuine financial difficulty, understanding safe harbour — and getting the right advice early — can materially change both the company's prospects and your personal exposure as a director.

RBizz works alongside insolvency and restructuring advisers to support directors navigating financial difficulty — get in touch early if your business is under pressure.

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Safe Harbour: How Directors Can Legally Keep Trading Through Financial Difficulty