Insolvent Trading Defences: Every Option Beyond Safe Harbour
Safe harbour under section 588GA of the Corporations Act gets most of the attention because it is the most flexible and commercially oriented of the available defences. But a director facing an insolvent trading claim has four other statutory defences under section 588H that are separate from safe harbour and can be available in different factual situations. Knowing which defence fits your facts, and understanding the evidentiary burden each imposes on you, is what turns a credible defence into one that actually succeeds.
The right defence to an insolvent trading claim depends on what you knew and when.
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The Primary Duty: Section 588G
A director breaches section 588G where the company incurs a debt when it is insolvent (or becomes insolvent because of the debt), the director was aware at that time that there were reasonable grounds to suspect insolvency, and a reasonable person in a like position would have been so aware. Personal liability for those debts follows. The defences below are available once a liquidator establishes those elements.
Section 588H: The Statutory Defences
1. No reasonable grounds to expect insolvency: the reasonable expectation defence
This defence applies where, at the time the debt was incurred, the director had reasonable grounds to expect and did expect that the company was solvent and would remain solvent even if it incurred that particular debt. The expectation must be both genuine and objectively reasonable. A director who convinces themselves the company is solvent despite all available evidence suggesting otherwise will not succeed. The defence requires documented, credible financial information that genuinely supported a solvent position at the relevant time.
2. Reasonable reliance on information from a competent officer: the delegation defence
A director who had reasonable grounds to believe, and did believe, that a competent and reliable person was responsible for providing them with adequate information about the company’s solvency, and who relied on that information in good faith, may have a defence where the information provided to them (at the relevant time) gave no grounds for suspicion of insolvency. This is the defence most commonly attempted where a director was not involved in day-to-day financial management and relied on a CFO, accountant, or finance team.
The requirement of reasonableness is exacting. A director cannot simply delegate responsibility and disengage entirely. They must have put in place a reasonable system for receiving financial information, must have had good reason to trust the person responsible, and must have actually reviewed and relied on that information. A director who never reviewed financial reports, or who had reason to doubt the competence of the person providing them, will not succeed.
3. Illness or other good reason: the incapacity defence
A director who, because of illness or for some other good reason, did not take part in the management of the company at the time the debt was incurred has a potential defence. Like the DPN illness defence, this requires genuine incapacity during the relevant period, not merely a preference not to be involved. Medical evidence from the period in question, not a retrospective certificate, is essential. A director who signed documents, attended meetings, or participated in any other way during the allegedly incapacitating illness will find this defence unavailable.
4. Took all reasonable steps: the active mitigation defence
Where a director took all reasonable steps to prevent the company from incurring the debt, or to cause an administrator or liquidator to be appointed before the debt was incurred, this defence may apply. Courts interpret ‘all reasonable steps’ strictly. It is not enough to have thought about the problem or to have discussed it. The director must have actually taken tangible steps: raising the issue formally at board level, engaging with creditors, investigating restructuring options, or moving to appoint an administrator.
Safe Harbour: Still Often the Best Available Option
Safe harbour under section 588GA protects a director who, after suspecting insolvency, begins developing a course of action reasonably likely to produce a better outcome for the company than immediate administration or liquidation. Unlike the section 588H defences, which are reactive (applied after a liquidator brings a claim), safe harbour is proactive — it is designed to be engaged before the company formally enters external administration, and it protects debts incurred during the restructuring period from the outset rather than as a response to litigation.
The key advantages of safe harbour over the section 588H defences are flexibility and scope. It can protect significant volumes of new debt incurred during a genuine restructuring, provided the conditions are met. The section 588H defences are more limited in their application and more dependent on the specific facts of individual debt incurrences.
Small Business Restructuring: A Third Pathway
Since March 2021, eligible small businesses have access to the small business restructuring pathway under Part 5.3B of the Corporations Act. This process, overseen by a small business restructuring practitioner, allows a business to remain trading while a restructuring plan is developed and put to creditors. Where a director is engaged in a genuine small business restructuring, debts incurred in the ordinary course of the company’s business during the restructuring period are protected from insolvent trading liability, provided the restructuring practitioner consents or the debt is otherwise appropriate.
Eligibility requires the company to have total liabilities of less than $1 million, employee tax liabilities and superannuation to be current, and financial records to be up to date. This pathway is often faster and less costly than voluntary administration, and specifically designed for smaller businesses that remain fundamentally viable but need breathing room to restructure their debts.
Early legal advice before debts are incurred opens the most options. Reactive defences are harder.
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Frequently Asked Questions
Q: What is the difference between safe harbour and the section 588H defences?
A: Safe harbour under section 588GA is a proactive protection engaged by a director who begins a genuine restructuring course of action after suspecting insolvency. The section 588H defences are reactive — they are raised by a director after a liquidator has brought an insolvent trading claim. Safe harbour covers debts incurred during the restructuring period; the section 588H defences address specific circumstances at the time each individual debt was incurred.
Q: Can I rely on my accountant’s advice that the company was solvent?
A: Potentially, under the reasonable reliance defence in section 588H. But the reliance must have been reasonable: you must have had good reason to trust that person, have received adequate financial information from them at the relevant time, and have genuinely believed, based on that information, that the company was solvent. A director who raises concerns and is told things are fine, and relies on that in good faith, is in a stronger position than one who never asked.
Q: What if I was genuinely ill for part of the relevant period?
A: The illness defence under section 588H(3) requires genuine incapacity, contemporaneous medical evidence, and a lack of participation in management during the period. A director who was unwell but still involved in any way is unlikely to succeed. The defence applies to the specific period of incapacity, not to the entire liability period if you were active at other times.
Q: Does the small business restructuring pathway protect existing debt or only new debt?
A: The protection applies to debts incurred in the ordinary course of business during the restructuring period. Existing debts that pre-date the appointment of the restructuring practitioner are addressed through the restructuring plan put to creditors, not through insolvent trading protection.
Q: What happens if none of the defences apply?
A: A director against whom insolvent trading is established, without a successful defence, faces personal liability for the relevant debts, civil penalties, and possible disqualification from managing corporations. Where the conduct was dishonest, criminal liability can also follow. The importance of early advice, before debts are incurred rather than after a liquidator is appointed, cannot be overstated.
Q: Can I use more than one defence?
A: Yes. Multiple defences can be run in the alternative in the same proceedings. A director might run safe harbour for some periods, reasonable reliance on a CFO for others, and absence from management for a third period, depending on the specific timeline of the company’s financial difficulties.
