When a company is approaching financial distress, directors need clear advice that is practical, legally sound and capable of being defended later. Australia’s Safe Harbour regime was designed to give directors room to pursue a genuine turnaround or restructuring plan without the immediate threat of civil insolvent trading liability. It does not, however, give directors a free pass to continue trading indefinitely. It requires discipline, evidence, current financial information, a realistic restructuring plan and continuous reassessment.
That raises an important practical question for boards, lenders and corporate advisers: should the board appoint a lawyer as the Safe Harbour adviser, or should that role be performed by an insolvency practitioner, restructuring accountant or other turnaround specialist?
In many cases, the better answer is not “lawyer or accountant”, but “lawyer-led, with specialist restructuring and financial input”. A lawyer can frame the engagement around the statutory Safe Harbour requirements, directors’ duties, privilege and future litigation risk. A restructuring practitioner or accountant can provide the financial analysis, cash flow modelling, options analysis and implementation support. Properly structured, that model may also help preserve the potential for the restructuring practitioner to accept a later appointment as voluntary administrator, receiver or receiver and manager. It does not, however, automatically preserve independence, remove conflicts or guarantee that the practitioner can accept a later appointment.
What is Safe Harbour?
Section 588G of the Corporations Act 2001 (Cth) imposes a duty on directors to prevent a company from incurring debts while insolvent, or where the company becomes insolvent by incurring those debts. Safe Harbour, in section 588GA, operates by excluding civil insolvent trading liability where its requirements are met. The statute provides that section 588G(2) does not apply to a person and a debt where, after the person starts to suspect that the company may become or be insolvent, the person starts developing one or more courses of action that are reasonably likely to lead to a better outcome for the company, and the debt is incurred directly or indirectly in connection with that course of action or in the ordinary course of the company’s business.
A “better outcome” means an outcome that is better for the company than the immediate appointment of an administrator or liquidator. Safe Harbour therefore focuses on comparison: is the proposed course of action reasonably likely to produce a better result for the company than immediate external administration? It is not enough to hope that trading on will improve matters. The board must be developing or implementing a genuine course of action, based on properly informed analysis, and must continue to test whether that course remains reasonably likely to lead to a better outcome.
Safe Harbour is not an immunity from all claims or duties. ASIC guidance makes clear that directors must continue to comply with their general directors’ duties, including duties of care and diligence, good faith, proper purpose, and prohibitions on misuse of position or information. For listed companies, continuous disclosure obligations also continue to apply.
When should Safe Harbour be considered?
Safe Harbour should be considered when directors start to suspect that the company may become insolvent or is already insolvent, but there remains a credible restructuring, refinancing, sale, recapitalisation, operational turnaround or other course of action that may produce a better outcome than immediate administration or liquidation.
ASIC’s guidance emphasises that directors should actively monitor solvency, act in a timely manner to investigate financial difficulties and, where appropriate, use Safe Harbour to provide time and flexibility to consider options to restructure the company. In practice, Safe Harbour is most useful where the business is under pressure but not beyond rescue, and where directors are prepared to impose structure around decision-making, reporting, stakeholder engagement and cash control.
Safe Harbour will usually be considered in circumstances such as:
- A liquidity crisis
- A looming covenant breach
- Withdrawal of lender support
- Major litigation or regulatory exposure
- Adverse trading conditions
- Supply chain disruption
- Loss of a key customer
- A failed capital raising
- A need to negotiate with landlords, financiers, employees, suppliers or noteholders
It should not be treated as a last-minute label attached to a company that has already run out of options.
How does Safe Harbour operate as a defence?
Safe Harbour is best understood as an evidentiary and statutory protection that a director may rely on if later faced with an insolvent trading claim. A director who wishes to rely on Safe Harbour bears an evidential burden. That means the director must point to evidence suggesting a reasonable possibility that the Safe Harbour requirements are satisfied.
The statutory factors relevant to whether a course of action was reasonably likely to lead to a better outcome include whether the director was:
- Properly informing themselves of the company’s financial position
- Taking appropriate steps to prevent misconduct
- Ensuring the company maintained appropriate financial records
- Obtaining advice from an appropriately qualified entity given sufficient information
- Developing or implementing a restructuring plan to improve the company’s financial position
ASIC’s guidance is consistent with that statutory approach. It states that directors should document decisions and retain supporting evidence, including financial forecasts, analysis, board minutes, records of the course of action, monitoring steps and notes showing how debts incurred were connected with the course of action or incurred in the ordinary course of business.
Safe Harbour will not be available in all circumstances. Unless the Court orders otherwise, it will not apply if, at the relevant time, the company is not substantially complying with obligations to pay employee entitlements, including superannuation, or with tax lodgement obligations, or if there have been two or more failures of that kind in the preceding 12 months. Safe Harbour may also be lost if, after the debt is incurred, the director fails to substantially comply with obligations to provide information or books to a subsequently appointed controller, administrator or liquidator.
Who can be the Safe Harbour adviser?
The Corporations Act does not require a single nominated “Safe Harbour adviser”, nor does it say that the adviser must be a registered liquidator, accountant or lawyer. The statutory question is whether the company or director obtained advice from an “appropriately qualified entity” that was given sufficient information to give appropriate advice.
ASIC says that an appropriately qualified adviser may include a registered liquidator, lawyer or accountant, depending on the nature of the advice sought and the circumstances of the company.
ASIC also says the relevant considerations may include:
- The nature, size and complexity of the company’s business
- The adviser’s qualifications and professional memberships
- Industry experience
- Available resources
- Professional indemnity insurance
That means the board has flexibility. A lawyer may be appropriately qualified to advise on the legal requirements of Safe Harbour, directors’ duties, governance, disclosure, privilege, stakeholder communications, board process and the legal consequences of various restructuring alternatives. A restructuring accountant or insolvency practitioner may be appropriately qualified to advise on cash flow, solvency indicators, scenario modelling, estimated returns, operational turnaround options and the likely outcomes of administration, liquidation, receivership or a deed of company arrangement. In many distressed situations, the safest model is a combined team.
The case for lawyer-led Safe Harbour
There are several reasons why a board may prefer to appoint a lawyer as the lead Safe Harbour adviser.
First, Safe Harbour is ultimately a legal defence to a statutory insolvent trading claim. The board’s decision-making should therefore be structured by reference to the elements of section 588GA, the evidentiary burden, directors’ duties, continuous disclosure issues, employee entitlement and tax lodgement requirements, and the circumstances in which the protection may start, stop or be lost. A lawyer is well placed to translate the commercial turnaround strategy into a legally coherent Safe Harbour record.
Secondly, privilege may be a significant benefit, but it should not be overstated. Safe Harbour work often requires candid discussion of solvency risk, director exposure, creditor pressure, lender strategy, potential breaches, litigation risk and contingency planning for administration or receivership. If the engagement is properly structured, legal advice and documents prepared for the dominant purpose of obtaining or giving legal advice, or for anticipated litigation, may attract legal professional privilege. The involvement of lawyers does not automatically cloak all financial analysis, modelling, board papers or consultant work product with privilege, particularly where documents are prepared for mixed legal, commercial and financial purposes. That discipline can be valuable if the company later enters liquidation and a liquidator seeks access to board papers, reports, emails and adviser files.
The doctrinal foundation for the lawyer-retained model is worth stating, because it explains why the structure of the engagement matters. Under the principle recognised by the Full Federal Court in Pratt Holdings Pty Ltd v Commissioner of Taxation [2004] FCAFC 122, a document prepared by a third party, including an accountant, may attract legal advice privilege where it is brought into existence for the dominant purpose of the client obtaining legal advice. Where the law firm retains the restructuring practitioner so that the practitioner’s financial analysis informs the firm’s legal advice, that analysis is capable of attracting the client’s privilege; where the board retains the practitioner directly for commercial purposes, it generally is not.
Two further points should inform how the engagement is set up. The first is who the client is. Safe Harbour protects directors personally, and if the company is the only client, the privilege belongs to the company. This means that, on a winding up, the liquidator will generally control it and may choose to waive it. There is therefore a strong argument for structuring the engagement so that the directors personally (as well as the company, where appropriate) are clients for the Safe Harbour advice.
The second point is that privilege operates as a shield the directors control, rather than a permanent cloak. Because a director relying on Safe Harbour bears an evidential burden, directors will often choose to deploy the advice and underlying analysis if the defence is ever needed, waiving privilege deliberately and at a time of their choosing, over a record built with that day in mind. None of this converts commercial advice into legal advice, and each document will be assessed against its own dominant purpose. But the difference between a record the directors control and a record a liquidator reads first can be decisive.
Thirdly, a lawyer-led process can help the board maintain a clear documentary record without creating avoidable admissions. Safe Harbour requires evidence, but poorly drafted documents can create unnecessary litigation risk. The objective is not to hide the position. It is to ensure that the board’s analysis is accurate, disciplined and framed against the statutory test: what did the directors know, what course of action was being developed or implemented, why was that course reasonably likely to lead to a better outcome, and how were subsequent debts connected with that course or incurred in the ordinary course of business?
Fourthly, lawyers can coordinate multi-disciplinary advice while preserving a single line of governance. Safe Harbour engagements commonly require input from restructuring accountants, insolvency practitioners, tax advisers, employment lawyers, financiers, operational consultants and, for listed entities, disclosure counsel. A lawyer can act as the central adviser to the board and retain specialists to assist in providing legal advice. That structure may reduce duplication, improve control of sensitive information and help ensure that financial analysis is directed to the legal questions that matter.
The limits of lawyer-led Safe Harbour
A lawyer should not be appointed as Safe Harbour adviser on the assumption that legal advice alone is enough. In many distressed situations, the core questions are financial and commercial:
- What is the company’s actual and forecast cash position?
- What debts will fall due?
- What funding is available?
- What assumptions support the turnaround plan?
- What are the estimated returns under alternative scenarios?
- What would likely occur in an immediate administration or liquidation?
ASIC’s guidance says directors should consider obtaining advice about the company’s financial position, the options available to address financial difficulties, and whether it is realistically possible for the company to continue trading while attempting to restructure. ASIC also recognises that advisers may assist directors to prepare cash flow budgets and negotiate with creditors.
A lawyer who lacks the financial expertise, operational restructuring experience or insolvency market knowledge required for the circumstances should not purport to provide that advice alone. The board should consider whether multiple appropriately qualified entities are required, including advisers with accounting, legal, financial and industry-specific expertise.
The main downside of a lawyer-led model is that it can create false comfort if the legal wrapper is treated as more important than the substance. Privilege does not make an unrealistic plan realistic. Nor does privilege overcome failures to pay employee entitlements, comply with tax lodgements, keep adequate books or continuously reassess the course of action. The Safe Harbour analysis must be commercially robust, not merely legally well documented.
The case for appointing a restructuring practitioner directly
There are also strong reasons why a board might appoint a restructuring practitioner or insolvency accountant directly as the Safe Harbour adviser.
A restructuring practitioner will often be best placed to:
- Test liquidity
- Prepare short-term cash flow forecasts
- Assess whether a business can continue trading
- Identify restructuring options
- Estimate returns in administration or liquidation
- Negotiate with lenders and major creditors
- Assist with implementation
Those tasks are often central to establishing whether the proposed course of action is reasonably likely to lead to a better outcome.
A direct appointment may also be efficient. The practitioner can work closely with management, obtain financial information directly, challenge assumptions and provide a report that addresses the financial and operational issues without the additional step of reporting through lawyers.
The disadvantage is that a direct Safe Harbour appointment by the restructuring practitioner may create more acute independence issues if the same practitioner is later proposed as voluntary administrator, liquidator or receiver. That does not mean the practitioner can never accept a later appointment. It does mean the nature and extent of the prior engagement will need close scrutiny and disclosure, especially if the practitioner may later need to investigate or defend the same analysis, assumptions or decisions on which the directors relied.
Does a prior Safe Harbour role prevent a later voluntary administration appointment?
Not necessarily. The leading practical point is that Australian law does not impose an automatic rule that a practitioner who has previously advised a distressed company can never later become its voluntary administrator. In Habrok (Dalgaranga) Pty Ltd v Gascoyne Resources Ltd [2020] FCA 1395, the Federal Court observed that it is commonplace for a company to seek professional advice about apprehended insolvency and voluntary administration, and that this does not of itself preclude the adviser from becoming administrator. That observation should not be treated as a general green light. The outcome remains fact-specific: in that case, the prior adviser had not provided Safe Harbour advice, had not been involved in management and had disclosed its prior relationship.
The same case is important because the Court considered, but did not treat as determinative, industry guidance suggesting that an insolvency practitioner who had provided advice relied upon for Safe Harbour should not take a subsequent appointment as administrator. The Court stated that industry codes cannot dictate the proper construction and application of the statutory provisions.
The question is therefore fact-specific. Relevant matters will include the scope of the prior engagement, whether the practitioner gave Safe Harbour advice themselves or merely provided limited financial analysis, whether they were involved in management, whether they advocated for a particular restructuring plan, whether they may need to review or investigate their own prior advice, whether they have a personal interest in defending the prior work, whether creditors could reasonably perceive a lack of independence, and whether the prior relationship is properly disclosed.
Administrators must be independent. They owe duties to the company and are subject to statutory duties, equitable duties including the duty to avoid conflicts, and industry standards (Australian Securities and Investments Commission v McDermott, in the matter of Conalpin Pty Ltd (in liq) [2016] FCA 1186). The Corporations Act also requires an administrator to make a declaration of relevant relationships.
A lawyer-led Safe Harbour model may assist, but it is not determinative. If the lawyer is the Safe Harbour adviser and the insolvency practitioner is retained by the lawyer as a consultant to provide financial analysis for the purpose of the lawyer’s advice, the practitioner may be better able to argue that they did not provide Safe Harbour advice to the directors, did not advise the board directly on whether the directors could rely on Safe Harbour, did not participate in management, and did not assume responsibility for the legal defence. That may reduce, but will not remove, the risk of later challenge.
That approach has direct judicial support. In Korda, in the matter of Ten Network Holdings Ltd [2017] FCA 914, the practitioners had been retained in the weeks before the company’s collapse, not by the company but by the board’s solicitors, to provide limited-scope contingency planning and financial analysis to support the solicitors’ advice to the directors. When the directors subsequently appointed those practitioners as voluntary administrators, the Federal Court held that the prior engagement did not compromise their independence, and made directions that they were justified in acting.
The features the Court emphasised repay attention:
- The practitioners were engaged by the lawyers to assist them in advising the directors, rather than advising the company on its affairs at large
- The scope of the engagement was confined and its duration short
- The work did not extend to transactions the administrators might later need to investigate
- The practitioners’ existing knowledge of the business was a benefit to creditors, saving the time and cost of a new appointee getting up to speed
Like Habrok, the decision is fact-specific rather than a general licence, and where a prior engagement is substantial or sensitive, seeking directions from the Court early in the administration remains a prudent protective step. But it is direct authority that a properly confined, lawyer-retained consultancy can be consistent with a later appointment as administrator.
The practitioner would still need to consider whether the work performed was so substantial, evaluative or central to the Safe Harbour position that a reasonable creditor might apprehend a lack of independence. If the practitioner prepared the financial analysis that underpinned the Safe Harbour report, and later as administrator must investigate insolvent trading, creditor-defeating dispositions, director conduct, solvency, the reasonableness of the turnaround plan or the directors’ reliance on Safe Harbour, there is an obvious risk that the practitioner may be reviewing their own work. That risk may be manageable in some cases through disclosure, limited scope and independent legal advice. In other cases, it may be disqualifying as a matter of prudence even if not automatically prohibited by statute.
What about a later receivership appointment by a secured creditor?
The analysis is similar but not identical for receivership. A receiver’s primary role is to collect, manage and realise the charged property for the benefit of the secured creditor, rather than to administer the company for creditors generally. Australian Securities and Investments Commission v Dunner [2013] FCA 872 summarises the role of a receiver as being primarily concerned with gathering in, managing and realising charged assets with a view to liquidating the secured creditor’s debt, and states that the receiver’s primary duty is to the mortgagee or chargee under the relevant security.
That difference may make a later receivership appointment more feasible than a later voluntary administration appointment in some cases. A voluntary administrator may need to investigate the company’s affairs, report to creditors and opine on whether a deed of company arrangement, liquidation or return to directors is in creditors’ interests. A receiver appointed by a secured creditor is focused on the secured assets and the secured debt. The risk of the practitioner having to adjudicate on their own Safe Harbour advice may therefore be less acute, depending on the nature of the appointment, the assets and the issues likely to arise.
However, receivers are still officers of the corporation and are subject to statutory duties, equitable duties and industry standards. A prior role for the company or its directors can still create conflict issues, confidentiality issues, perceived alignment with management, or practical difficulties if the receiver must investigate, sell, challenge, explain or otherwise deal with pre-appointment transactions, trading decisions, asset sales or conduct in which the practitioner had prior involvement.
A lawyer-led structure may again be helpful. If the practitioner’s role was limited to providing financial analysis to the lawyers, and the secured creditor later wishes to appoint that practitioner as receiver because of their knowledge of the business and assets, the prior involvement may be less problematic than if the practitioner had been the board’s direct Safe Harbour adviser. The secured creditor may value that familiarity because the practitioner can move quickly, understand the cash position, identify critical assets, engage with management and preserve value.
The critical point is that the prior role must be carefully reviewed before appointment. The practitioner should assess whether there is an actual conflict, a potential conflict or an appearance of conflict. The secured creditor should also consider whether the appointment could be challenged by the company, directors, unsecured creditors or other stakeholders. If the practitioner is likely to need to investigate or impugn work they performed before appointment, another practitioner may be safer.
Does appointing the lawyer keep the accountant "clean"?
It may help, but it is not a complete answer. Appointing the lawyer as Safe Harbour adviser does not, by itself, preserve the insolvency practitioner’s independence for a later appointment.
A lawyer-led engagement can improve the position in four ways:
- It can define the lawyer as the adviser responsible for the Safe Harbour advice
- It can limit the restructuring practitioner’s role to financial modelling, options analysis or factual assistance
- It may support a claim for legal professional privilege over communications and reports prepared for the dominant purpose of legal advice or anticipated litigation
- It can reduce the likelihood that the practitioner is later seen as having advised the directors personally on the availability of Safe Harbour
But independence is assessed by substance, not labels. If the restructuring practitioner effectively designed the Safe Harbour strategy, advised the board directly, recommended that the company continue trading, prepared the central better-outcome analysis, participated in creditor negotiations on behalf of the company, or became closely associated with management’s plan, then describing the practitioner as a consultant to the lawyer may not be enough. A Court or creditor will look at what the practitioner actually did, not merely how the engagement was described.
The most defensible structure is one in which the lawyer gives the Safe Harbour advice, the practitioner provides clearly scoped financial and restructuring assistance to the lawyer, the practitioner does not make board decisions, the board remains responsible for the course of action, and any future appointment is preceded by a fresh conflict and independence assessment. Where a later appointment is contemplated, the scope of the practitioner’s pre-appointment work should be deliberately limited and documented from the outset.
Practical structuring points
Boards considering Safe Harbour should treat the engagement structure as part of the risk management exercise.
The engagement letter should identify:
- Who the client is
- What advice is being sought
- Whether the dominant purpose includes legal advice or anticipated litigation
- Who may receive the advice
- How consultants will be retained
Where privilege is important, the lawyer should retain the restructuring practitioner or accountant, and communications should be channelled consistently with that structure. The practitioner’s scope should be specific: for example, to assist the lawyers by preparing cash flow analysis, scenario modelling, estimated return comparisons or financial information required for the lawyers’ advice.
The board should also maintain a clear decision record. The lawyer and financial adviser can advise, but the directors must decide. ASIC states that the director remains responsible for deciding which course of action to pursue, including considering any advice obtained.
If there is any realistic possibility that the restructuring practitioner may later be asked to act as voluntary administrator, liquidator, receiver or receiver and manager, that possibility should be considered at the start. The engagement should avoid unnecessary involvement in management decisions, avoid the practitioner becoming the public face of the board’s plan, and avoid direct advice to directors on their personal Safe Harbour protection unless the practitioner is prepared to accept that this may affect future appointment options.
Conclusion
For many boards, the strongest Safe Harbour model will be lawyer-led and restructuring-practitioner supported. Safe Harbour is a statutory legal protection, and lawyers are well placed to structure the advice, preserve privilege, guide board process and manage litigation risk. But Safe Harbour also depends on credible financial analysis, realistic options and continuous commercial assessment. That usually requires input from an experienced restructuring practitioner or insolvency accountant.
Appointing the lawyer as the Safe Harbour adviser may also preserve optionality. If the company later needs to enter voluntary administration, or if a secured creditor later appoints receivers, the restructuring practitioner who assisted the lawyer may be in a better position to accept the appointment than a practitioner who acted as the board’s direct Safe Harbour adviser, provided the prior role was properly limited, documented and disclosed. That is particularly useful where the practitioner’s knowledge of the business, assets and cash position would help preserve value in a fast-moving appointment.
The point should not be overstated. A lawyer-led structure does not automatically remove conflicts, cure independence concerns or guarantee that the practitioner can later accept an appointment. Australian law requires a fact-specific assessment of the practitioner’s prior role, the nature of the proposed appointment, the issues likely to be investigated and the perception of creditors and other stakeholders. But with careful scoping, proper privilege protocols and a clear division between legal advice and financial analysis, boards can obtain the benefits of both disciplines while preserving more restructuring options if Safe Harbour does not succeed.
