by Drazen Kozaric
On 6 December 2024, ASIC released an updated Regulatory Guide 217 (RG 217), providing revised clearer guidance for directors and advisers on preventing insolvent trading, including expanded advice on the safe harbour defence.
Directors’ Duty to Prevent Insolvent Trading: 4 Core Principles
Actively monitor solvency: Keep up-to-date with financials, budgets, debts, and available funding.
Investigate financial difficulties: If signs of distress appear, act quickly to assess the company’s true position.
Seek qualified advice: Engage reliable, insured professionals early to evaluate solvency and strategic options.
Act promptly and decisively: Implement advice fast. If insolvency is confirmed, take immediate steps and record the rationale.
Safe Harbour Defence
Safe harbour defence is a legal defence protecting directors from personal liability for insolvent trading if they pursue a course of action reasonably likely to lead to a better outcome than immediate liquidation.
Valid courses of action may include:
Restructuring operations a. Negotiating with creditorsb. Selling assetsc. Raising capitald. Appointing advisers or preparing for voluntary administration
Restructuring operations
a. Negotiating with creditors
b. Selling assets
c. Raising capital
d. Appointing advisers or preparing for voluntary administration
“Better outcome” defined:
a. Measured relative to immediate insolvency proceedings – it should be better than administration or liquidation of the company
i. Depends on company size, industry and specific challenges
ii. Requires ongoing assessment and credible, documented reasoning
“Reasonably likely” meaning:
a. Doesn’t need more than 50% probability of a better outcome than administration or liquidation; and
b. Must not be remote or fanciful—should be fair, realistic and supported by reasonable judgment and evidence.
Losing safe harbour
If the director’s strategy becomes unworkable or no longer meets the “reasonably likely” test, safe harbour protection ends.
Examples of invalid actions:
Ignoring expert advice
Over-ordering while insolvent
Drawing on debt you know can’t be repaid
Continuing to trade “as usual” during distress
How ASIC Will Assess Directors’ Conduct?
ASIC will examine whether directors:
Monitored solvency properly;
Took early action and sought professional advice;
Developed and implemented a sound course of action; and
Maintained adequate records and documentation.Evidence tables in RG 217 list documents ASIC may look for when evaluating compliance or safe harbour claims
Maintained adequate records and documentation.
Evidence tables in RG 217 list documents ASIC may look for when evaluating compliance or safe harbour claims
Conclusion
This updated RG 217 marks a shift toward greater accountability and practical clarity, encouraging directors to act early and wisely when facing financial distress—while clearly spelling out how they can lawfully avoid personal liability.