Following several large-scale insolvencies in recent times, company boards should be seeking to assess the rigour of their own corporate governance frameworks. The rise in company collapses should also prompt company directors to be extra careful about fulfilling their responsibilities to the company and its creditors.

If a company is experiencing financial distress, individual directors must maintain heightened vigilance regarding their fiduciary duties to the company and its creditors. A board’s failure to do so may expose individual directors to significant personal liability and, in some cases, criminal prosecution in the event of reckless or intentionally dishonest conduct.

The troubles faced by the boards of the Melbourne Rebels and Rex Airlines following their collapse into voluntary administration are telling examples of where deficiencies in corporate governance are putting individual directors at risk of personal liability or civil and/or criminal penalties due to breaches of the Corporations Act 2001.

Company directors in Australia face several personal liability risks:

  1. Insolvent Trading: Directors must ensure that the company does not trade while insolvent. If they allow the company to incur debts when it cannot pay them, directors can be held personally liable for those debts.
  2. Breach of Fiduciary Duties: Directors have a duty to act in the best interests of the company and its shareholders. Breaching these duties can result in personal liability for any losses incurred by the company.
  3. Director Penalty Notices (DPNs): The Australian Taxation Office (ATO) can issue DPNs to directors, making them personally liable for unpaid company tax debts, including PAYG withholding and superannuation.
  4. Voidable Transactions: Directors can be held liable for transactions that are deemed voidable, such as uncommercial transactions or preferential payments that unfairly benefit one creditor over others.
  5. Regulatory Breaches: Directors can face personal liability for breaches of various regulatory requirements, including those related to corporate governance, environmental laws, and workplace safety.
  6. Illegal Phoenix Activity: Engaging in illegal phoenix activity, where a new company is created to continue the business of an insolvent company, can lead to severe penalties and personal liability.

If businesses are experiencing financial underperformance, maturing debt profiles or require significant decisions regarding their future strategy, the board and directors should seek appropriate advice and consider whether a ‘safe harbour’ regime is required to meet any challenges and implement a turnaround plan.

Earlier this year, Star Entertainment Group disclosed to the ASX that it had entered safe harbour. While listed companies have continuous disclosure obligations including significant changes to the company’s financial position, there isn’t a requirement to explicitly announce their reliance on safe harbour. This disclosure demonstrated the board was taking seriously its obligations while attempting to implement a restructuring plan for a business experiencing distress.

What is ‘safe harbour’?

The safe harbour regime was introduced in 2017 and has become an important corporate restructuring tool to explore options while protecting the position of directors. It enables boards to develop and implement a restructure plan that provides a better outcome for a company than would be the case if there was an immediate appointment of an administrator or liquidator.

The safe harbour regime also provides directors with protection from personal liability for debts incurred whilst developing and implementing the plan. Most importantly, a safe harbour regime enables transparent discussions regarding the options available and restructuring to resolve structural or business issues.

The key tenants of the safe harbour regime are centred on:

Where are we? What is the real position?

Understand the current strategic, operational and financial position of the company. The current financial position includes bringing financial accounts and lodgements up to date that correctly quantify income tax liabilities, superannuation, PAYG withholding and other debts as well as possible.

The Plan – building options for a way out

Document how the position of the company will be maintained and/or improved while a solution to issues is determined. This could include weekly cash flow forecast including funding requirements and ensuring tax lodgements are current, but this can be managed by arrangement. Proactive management of the ATO and bank positions is most likely to achieve a better outcome.

What needs to be done – how the options are explored and executed

Implement the plan in a timely manner and monitor the actual benefits verses the planned benefits and outcomes.

In a more challenging operating environment, it is especially important to be aware of how a company is performing. Any directors on companies facing financial or operating difficulties must be prepared to act proactively and pragmatically.

This article was first published in the Autumn 2025 issue of Financial Times.