Most directors of a small company know what a tight month feels like. The harder moment is when the tight months run together and an honest question forms: can the company actually pay its debts as they fall due? Australian law puts real personal risk on a director who lets an insolvent company simply trade on, but it also gives a director who confronts the problem two structured ways through it. The safe harbour protects a director who pursues a genuine turnaround plan, and small business restructuring lets an eligible company deal with its debts while the directors stay in control. Both reward the same behaviour: acting early, on proper advice, with honest numbers in front of you.
Why does insolvency put a director personally at risk?
A company normally stands between its directors and its debts. Insolvent trading is the main exception. Under the Corporations Act 2001 (Cth), a director has a duty to prevent the company incurring new debts while it is insolvent, meaning it cannot pay its debts as and when they fall due, or where there are reasonable grounds to suspect it is. A director who breaches that duty can be made personally liable to compensate for the debts incurred, and serious cases can attract penalties on top. This duty sits alongside the general obligations every director carries; our guide to director's duties in Victoria covers those. The practical point is blunt: once you have real grounds to suspect the company may be insolvent, doing nothing is the one response the law punishes most reliably.
What is the safe harbour?
The safe harbour has been part of the Corporations Act since 2017, and it exists because the old settings pushed a worried director toward tipping the company into administration at the first sign of trouble, even when the business underneath was worth saving. It protects a director from insolvent trading liability where, after starting to suspect the company may become or be insolvent, the director starts developing one or more courses of action reasonably likely to lead to a better outcome for the company than the immediate appointment of an administrator or liquidator. Debts incurred directly or indirectly in connection with that course of action are covered while the protection lasts. Nothing is filed and nothing is made public: safe harbour is not a formal insolvency process but a shield around a genuine rescue attempt. It begins when the work on the plan begins, and it ends if the plan is abandoned, stops being reasonably likely to deliver that better outcome, or the company ends up in administration or liquidation anyway.
What does safe harbour actually require of you?
More than good intentions. In judging whether a course of action was reasonably likely to lead to a better outcome, the law points to practical markers: whether the director kept properly informed of the company's financial position, kept proper books and records, took steps to prevent misconduct by officers and employees, obtained advice from an appropriately qualified adviser, and was developing or implementing a plan to restructure the company and improve its position. Two housekeeping conditions matter just as much. The protection is generally not available while the company is behind in paying employee entitlements, including superannuation, or behind in giving the returns and other documents the tax law requires. And if the question is ever tested, it is for the director to point to evidence that the safe harbour applied, which makes contemporaneous records of the advice taken, the plan adopted and the steps followed almost as important as the plan itself.
Worried about whether your company can meet its debts, or about your own exposure as a director? Call (03) 9125 8355 or send an enquiry.
What is small business restructuring?
Small business restructuring is a formal process introduced in 2021 for smaller companies in financial difficulty. The company appoints a small business restructuring practitioner and, with their help, puts a plan to creditors to restructure its debts, commonly by paying a set portion of what is owed over an agreed period. What sets it apart from voluntary administration is control. The directors keep running the business day to day while the plan is prepared and voted on, instead of handing the company over to an external administrator. If creditors accept the plan, it binds the unsecured creditors it covers and the company trades on with a balance sheet it can actually carry. The process runs to tight statutory timeframes measured in weeks rather than months, so the groundwork is best done before the process starts, not during it.
Is your company eligible for small business restructuring?
The process is aimed squarely at small companies. Broadly, the company's total liabilities must be under $1 million when the process begins, the employee entitlements that are due for payment must have been paid, the company's tax lodgements must be up to date, and there are restrictions where the company or its directors have been through the process before. The entitlements and lodgement conditions trip up more companies than the liabilities cap does: a company that has drifted behind on superannuation or activity statements often needs to bring that position current before restructuring is open to it. Eligibility has fine print beyond this outline, so treat this as the shape of the test rather than the whole of it, and take advice on your company's actual position.
Safe harbour or restructuring: which one fits?
They solve different problems, and they often work in sequence rather than in competition. Safe harbour suits a company whose underlying business looks viable and whose plan is to trade through the difficulty: new investment, an asset sale, cost restructuring, a refinance. It protects the directors while that happens, but it does not reduce a single dollar of debt. Small business restructuring deals with the debts themselves, binding creditors to a compromise the company can afford, but only eligible companies can use it and the plan must win creditor support. In practice, a director who acts early often starts inside safe harbour, working with advisers on the options, and the course of action that emerges may be a restructuring plan, a sale, a refinance or, where the honest answer is that the company cannot be saved, an orderly administration or liquidation. The safe harbour test asks only whether the path you are on is reasonably likely to beat an immediate administration or winding up, not whether it is guaranteed to succeed.
Which warning signs should a director not ignore?
Insolvency rarely arrives unannounced. The signs that matter are the ones courts later say a reasonable director would have acted on: losses continuing month after month, old debts paid only by incurring new ones, tax and superannuation falling into arrears and being used as informal working capital, suppliers moving the company to cash on delivery, and creditors issuing formal demands. A statutory demand deserves particular respect, because ignoring one has serious consequences for the company; our guide to debt recovery in Victoria explains how those demands work from the creditor's side. None of these signs proves insolvency on its own. Together, they are the trigger for getting real numbers and real advice, because both safe harbour and small business restructuring reward the director who moves while options still exist.
Practical steps to take now
Start with the numbers: get an honest, current picture of the company's cashflow, debts and upcoming obligations, because every option depends on knowing the true position and a director is expected to be across it. Bring superannuation and tax lodgements as current as the company can manage, since arrears in either narrow both paths described above. See your accountant and a lawyer early and together, because what the company can afford and what your exposure and options are form two halves of the same decision. Write things down as you go: the advice received, the plan settled on, the steps taken and when. And be realistic about personal guarantees given to landlords, financiers and suppliers, because company processes do not erase personal guarantee liability and it needs to be part of the plan rather than a surprise at the end.
How we help
Spencer Alexander Lawyers advises company directors across Victoria who are worried about the company's position or their own. We help you understand your exposure, put safe harbour protection on a proper footing with the records to prove it, work alongside your accountant and, where a formal process is the right answer, with a restructuring practitioner, and respond to creditor pressure, including statutory demands. The first conversation is usually about options, not obligations, and having it early is what keeps the options open. Learn more about our commercial law practice.
Common questions
Can a director keep trading while the company is in financial difficulty? Yes, but with care. A director who suspects the company may be insolvent risks personal liability for new debts if it simply trades on. The safe harbour protects a director who starts developing a course of action reasonably likely to lead to a better outcome than immediate administration or liquidation, provided employee entitlements are being paid and tax lodgements are up to date.
Does safe harbour protect a director from all personal liability? No. Safe harbour is a protection against insolvent trading liability for debts connected with the course of action being pursued. A director's other duties continue to apply, and it is for the director to point to evidence that the safe harbour applied, so records of the advice taken and the steps followed matter.
Which companies are eligible for small business restructuring? Broadly, companies with total liabilities under $1 million that have paid the employee entitlements which are due and brought their tax lodgements up to date. The directors stay in control of day to day trading while a small business restructuring practitioner helps put a debt restructuring plan to creditors.
When should a director of a struggling company get advice? As soon as the warning signs appear: persistent cashflow shortfalls, tax or superannuation arrears, or creditors escalating. Safe harbour only covers the period after a director starts working on a genuine course of action, so every week of delay is a week without protection and with fewer options.
Weighing up safe harbour, restructuring or something harder, and unsure where your company actually stands? Call (03) 9125 8355 or send an enquiry.
This guide reflects the law applying in Victoria as at September 2026. It is general information only, not legal advice, and does not take your circumstances into account.
