Review of Australia’s insolvency safe harbour – s 588GA

Australia’s ‘safe harbour’ regime under s 588GA is due for review, since September 2019, as to whether it offers the right balance between creditor compensation and director discretion. Should the review first revisit whether the insolvent trading section – 588G – should be repealed or changed?

The focus of the review is to be on the impact of the availability of the safe harbour on directors’ conduct, and on the impact on the interests of creditors and employees, along with any other matters considered relevant.[1]

It is assumed that the 588HA review is based on the retention of the terms of insolvent trading under s 588G, the repeal and replacement of which was not in contemplation in the law reform process leading up to s 588GA. But that assumption may not be valid.

While some review structure of 588GA and mechanism for data collection might preferably have been set up when the section commenced in September 2017, there is now available some ex post commentary and experience as to how or whether the system works.

Survey information could extract some details, even though now well after the event. But there is an inherent difficulty in assessing a positive impact on director behaviour – earlier constructive attention to financial difficulties? – and beyond that what any change in behaviour has achieved – a revival of the business, or a liquidation with less adverse consequences than might have occurred had the director not acted?

The views of the various stakeholders

Survey participants would need to be well selected given the various and often competing industry groups involved – restructuring and turnaround advisers for the advisory process, liquidators for the end process of failure, directors in the middle, creditors and government agencies, and the courts, with some overlaps. The need for the review to identify self-interest is evident.

Restructuring and turnaround advisers are best placed to guide a struggling company and their objective views and data would be necessary. Published guidance on safe harbour, apart from usual marketing spiels, is TMA’s Best Practice Guidelines for safe harbour supported by its Code of Ethics. See also ARITA’s Coming back from the edge. These documents prompt issues for survey questions such as the nature and extent of any safe harbour retainer, the respective responsibilities of the adviser and the directors, and conflicts of interest and remuneration. Reliance on a respectable safe harbour guide gives some protection for both directors and advisers, supported by a code of conduct by which the advice is given.

The insolvency industry bodies ARITA and AIIP comprise many registered liquidators whose training is in insolvent external administrations. Where they will have particular experience is in dealing with a liquidation or administration that has been preceded by a [failed] safe harbour effort.  That would then bring in whether the directors had taken some or all of the steps necessary etc to protect themselves, and whether the carve out in their favour has assisted. Adoption of some structured safe harbour process may for example cause a liquidator to think twice before taking any 588G proceedings, given also that the law imposes a burden of proof on the liquidator, not the director.

However, no case law has yet surfaced; all the more that a survey might find out what is going on below that surface.

Many liquidators purport to be or are experienced in ‘turnaround’, offering advice to directors and managing the safe harbour process. There is however a perception at least that many liquidators might openly or otherwise look at a struggling business from an external administration mindset. Even if there is not that reality, perceptions are important.

Unsecured creditors are relatively unconstrained in the process save for their (assumed) knowledge of the realities that concessions now may lead to better outcomes later. Their views may be limited. In contrast, secured creditors are often an important part of any safe harbour process.

But it is the views of the government creditors with their particular interests and statutory obligations, the ATO and the FEG in particular, that will be important. The threshold requirements for safe harbour, of substantial compliance with the law, may depend on views and actions taken by those and other government agencies.

Directors are in reality the most important group and the views of the AICD, and lawyers and accountants, would assist.

Analysis of the law is necessary but may not be that useful in a review like this. There are many pressures on a struggling business and where or whether sections 588G and 588GA fit in at all will depend on many variables. Behavioural responses of directors will often prevail over objective advice, even if sought. Section 588G is often an empty and distant threat,[2] or impetus, for directors, rating well down their list of concerns about the loss of their business, personal tax liabilities, and dealing with poor and changing economic and market conditions.

Deeper analysis may not be useful at this early time.  Experience from the UK was that econometric testing of the impact of the Insolvency Act 1986 showed little after 2 years but substantially more 11 years later, and positively.  There was evidence that the Act played an important role in forestalling 1,100 corporate liquidations from 1986 up to the beginning of 1990, other variables being factored in. However, the impact did not continue long term though with potential to do so if the introduction of the Act had the effect of promoting a ‘rescue culture’: see Corporate Failure Rates and the Impact of the 1986 Insolvency Act: An Econometric Analysis, Jia Liu Nick Wilson, Credit Management Research Centre, Leeds University Business School, March 2000.

There is more to promoting a culture than passing a law and certainly in a short two year period.

New Zealand

It should be mentioned that there is some move to introduce a safe harbour regime in NZ similar to that of Australia, although its reckless trading regime appears more flexible. What is said to be a pending appeal in the NZ$36m reckless trading case in Mainzeal[3] may clarify that.

The 588GA review

The delay in any review being announced by the government may in fact be an acknowledgment that the 2 year period set by 588HA was too short. Whatever empirical data exists, supported by surveys, may not be enough to show much one way or the other.

There may also be the apprehension of having to again go through what was a tortuous and contentious debate which led up to 588GA, with competing industry groups seeking to move the balance one way or another depending on each one’s own constituents, or even to limit the ‘safe harbour’ advisers to their own members.

Any review of s 588GA will need to be strong-willed, and have substantiated, comprehensive and objective input along with whatever empirical data can in retrospect be gathered.


If the 588HA review is to properly examine the operation of 588GA, it should properly and initially need to assess whether s 588G is working and whether it should be retained or changed.

As to which, see the next article.


[1] Section 588HA.

[2] See The empty threat of insolvent trading (2009) Insolvency Law Bulletin 126, Murray

[3] Mainzeal Property and Construction Limited (in liq) v Yan [2019] NZHC 255; [2019] NZHC 1637.

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