Insolvent trading and the limits of safe harbour: what directors should take from Star Recruitment Service Pty Ltd v Smith

Erin Prout

Principal LawyerAitken PartnersView Profile

Australian safe harbour laws can help protect directors from personal liability for insolvent trading while they pursue genuine restructuring efforts, but the protection is limited and subject to strict conditions.

COVID-era protections were temporary and cannot be relied upon for challenging trading conditions outside the relevant period.

This article examines the scope of safe harbour under the Corporations Act 2001 (Cth), the circumstances in which directors may still face claims from creditors, liquidators or the ATO, and the practical steps directors should take to monitor solvency, keep accurate financial records and seek early advice when financial difficulties arise.

The Queensland Supreme Court’s decision in Star Recruitment Service Pty Ltd v Smith [2025] QSC 334 is a useful reminder that insolvent trading risk is not theoretical. The case analysis the temporary COVID-19 safe harbour protection under section 588GAAA of the Corporations Act 2001 (Cth) (Act).

Directors and creditors should take note that:

1. Creditors remain able to pursue compensation for loss resulting from insolvent trading against a director;
2. Section 588GAAA of the Act only provides protection to a director for debts incurred during 25 March 2020 to 31 December 2020;
3. The appointment of the insolvency practitioner does not need to occur between 25 March 2020 to 31 December 2020.

Summary of the Facts and Findings

Star Recruitment Service Pty Ltd (Star) provided labour hire services to GG Group (Qld) Pty Ltd (GG Group), which operated a strawberry farming business near the Glasshouse Mountains. Between August 2020 and November 2021, Star issued more than $1.63 million in invoices to GG Group which were not paid. GG Group was later placed into liquidation on 1 December 2021.

Star then brought a claim against GG Group’s sole director, Mr Smith, alleging that GG Group was trading whilst insolvent at the time it provided its services, in contravention of section 588G of the Act. Star claimed that Mr Smith was personally liable to compensate it for the loss and damaged suffered, in the sum of the outstanding invoices.

The Court found that Mr Smith was liable for insolvent trading in respect of debts incurred outside the temporary COVID-19 safe harbour period. Judgment was entered against him for $1,108,441.71, together with $321,422.28 in pre-judgment interest and costs.

Safe Harbour Defence

One of the central issues was whether Mr Smith could rely on the temporary COVID-19 safe harbour provision in section 588GAAA of the Act.

That provision was introduced during the pandemic and applied to certain debts incurred during the relevant COVID-19 period. The relevant period commenced on 25 March 2020 and ended on 31 December 2020.

Mr Smith argued that some of the debts claimed by Star were incurred during that period and he was therefore able to rely on protection from insolvent trading. Star argued Mr Smith was not able to rely on the temporary safe-harbour provision because the liquidator was not appointed between 25 March 2020 to 31 December 2020. The Court considered the arguments and accepted that there was ambiguity in the language of the Act.

The Court ultimately held that the true construction of section 588GAAA did not require a liquidator to be appointed during the relevant period – rather, one may be appointed. The Court came to this conclusion based upon the natural and ordinary meaning of the words in the section and the purpose of the section.

The Court found that invoices totaling $523,720.36 were issued during the safe harbour period and were therefore excluded from Star’s claim against Mr Smith. However, that was where the protection ended and Mr Smith remained exposed for the remainder of the debt.

Importance of the Defence

The decision illustrates the limits of safe harbour protection. It is not a broad defence to insolvent trading and will only assist a director for debts incurred during the safe harbour period. In addition, the debts must be incurred in the ordinary course of business.

In this case, the business operated in the agricultural sector, where seasonal conditions and fluctuating cash flow are not unusual. However, a seasonal business cycle does not remove the director’s obligation to monitor solvency. A director cannot simply rely on the hope that a future season, crop, payment or improvement in trading will resolve existing unpaid debts.

Lessons for directors

The practical lesson for directors is that:

1. Solvency must be monitored in real time.
2. Where invoices are overdue or the company is relying on future income to meet present debts, directors should be cautious about allowing the company to continue incurring further liabilities.
3. Directors should implement personal asset protection strategies early. Best practice is to do so prior to establishing the business.
4. Directors should also ensure that the company’s financial records are current and reliable. If the company is experiencing financial distress, directors should obtain advice early.

Key Takeaways

The temporary COVID-19 safe harbour provision may reduce a director’s exposure but in this case, it did not remove it. The outcome was still a seven-figure compensation order, plus interest and costs.

If you wish to obtain advice concerning safe harbour or insolvent trading, contact one of our experienced litigation and insolvency lawyers on (07) 3544 5659 or (03) 8600 6000.