Sailing in Safe(r) Waters: The Courts Clarify the Scope of Section 588GAAA of the Corporations Act 2001 (Cth)

That vexing question (among others) was resolved in part by the Coronavirus Economic Response Package Omnibus Act 2020 (Cth) (Omnibus Act), which introduced a safe harbour for insolvent trading. Far from smooth sailing, however, that provision has posed its own challenges.

Section 588GAAA

Section 588GAAA was inserted into the Corporations Act 2001 (Cth) (Act) by the Omnibus Act 2020 on 25 March 2020. In summary, the section provides that a director is temporarily protected from being liable for a debt incurred while a company is insolvent if:

1. the debt was incurred in the ordinary course of the company’s business;

2. the debt was incurred in the period from 25 March 2020 to 31 December 2020 (Safe-Harbour Period) (the period was originally from 25 March 2020 to 25 September 2020, but it was extended by the Corporations Regulations 2001 (Cth)); and

3. the debt was incurred before any administrator, restructuring practitioner or liquidator was appointed to the company.

The director seeking to rely on this provision bears an evidential burden to adduce evidence supporting it.

Cases Considering this Provision

Despite the introduction of s 588GAAA, only a handful of cases to date have referred to it. Of those, only two have given it any meaningful consideration. Notwithstanding that, some important lessons can be gleaned from them:

i. Preiner v Shin [2025] NSWDC 341

Preiner v Shin concerned an insolvent trading claim brought by the liquidator of a company against its director and a related entity, seeking to recover a total insolvent trading debt of $368,691.85 from the two defendants (divided unequally). Among other defences, the director sought protection under section 588GAAA in respect of the debts incurred during the Safe-Harbour Period.

Judge Gibson gave that submission short shrift. While her Honour accepted the (general) availability of that provision, her Honour’s view was that the director (who did not, in the end, give evidence) needed to demonstrate that the debt was incurred in the ordinary course of the Company’s business and during the Safe-Harbour Period. Her Honour declined to infer (from the fact that the Company was insolvent at that time) that the exception applied, and accordingly, did not award protection to the director.

ii. Star Recruitment Service Pty Ltd v Smith [2025] QSC 334

Section 588GAAA received far more extensive consideration in Star Recruitment Service Pty Ltd v Smith.

In that proceeding, the plaintiff was a licensed labour hire company. It supplied strawberry picking and packing workers to a company, GG Group (Qld) Pty Ltd (GG Group). The plaintiff was placed into liquidation on 1 December 2021 and was owed $1,632,162.07 by GG Group in outstanding invoices in respect of the period from 28 August 2020 to 3 November 2021. The defendant was the director of GG Group.

The plaintiff, being owed significant sums, sued the director for those debts pursuant to s 588M of the Act (which, in short, allows a creditor of an insolvent company to sue the director for any debts incurred while insolvent). The plaintiff alleged that GG Group was insolvent from 1 July 2020.

In defence to that claim, and in respect of part of the total debts, the defendant submitted that s 588GAAA of the Act applied. The plaintiff, in response, argued that, properly interpreted, s 588GAAA did not apply, because no administrator, restructuring practitioner or liquidator was appointed during the Safe-Harbour Period (and, the plaintiff said, s 588GAAA required that to happen before the defence was available).

Justice Muir analysed those two submissions in detail. While her Honour noted a latent ambiguity in the provision, on balance, her Honour found that (having regard to the broad purpose of the provision as described in its Explanatory Memorandum and second reading speech) the provision had the defendant’s preferred meaning; that is, it applied irrespective of whether an administrator, restructuring practitioner or liquidator was appointed to the company in that period.

Having found that the provision could apply, her Honour then found that it did apply in respect of $523,720.36 worth of debts incurred during the Safe-Harbour Period (32% of the total amount claimed).

It was uncontroversial that the debts were incurred at a time where no administrator, restructuring practitioner or liquidator was appointed, and that those debts were incurred during the Safe-Harbour Period. However, the plaintiff argued that the debts were not incurred in the ordinary course of business on the basis that the company was “clearly already insolvent” and therefore it was not “commercially rational” to incur those debts.

Her Honour did not accept that argument, noting that to “suggest that debts could not have been incurred in the ordinary course of the company’s business if the company was insolvent misses the point of s 588GAAA”.

Conclusion and Takeaways

While the relief provided by s 588GAAA is now entirely historical, it will still play an important role for many directors, particularly those who charted a course through the troubled waters of lockdown. With many companies having first indicated signs of financial vulnerability (if not insolvency) during that period, the risk of an allegation of insolvency during that period was, and remains, high.

The relief provided by s 588GAAA is not automatic, however, and a number of uncertainties remain surrounding its operation (in particular, whether s 588GAAA will protect directors whose companies were clearly insolvent prior to the commencement of the Safe-Harbour Period). To have the best chance of having the benefit of the Safe-Harbour Period, directors should be careful to maintain records which justify and explain the decisions taken during that period, and how those debts form part of the ordinary course of the company’s business.

If you are a director who is unsure about whether s 588GAAA relief may apply to certain debts incurred by the company, or if you are a liquidator investigating debts incurred by a company during the Safe-Harbour Period, we have a strong team of insolvency lawyers who can advise you regarding these issues.

Disclaimer

This article is provided for general information purposes only and does not constitute legal advice. It is not intended to address the specific circumstances of any individual or business. It is also not intended to be a comprehensive statement of the law and is limited to a general commentary on the Coronavirus Economic Response Package Omnibus Act 2020 (Cth) and Corporations Act 2001 (Cth).

Reliance should not be placed on this article as a substitute for obtaining legal advice tailored to your particular circumstances. If you require advice on how the s 588GAAA may still affect you, you should obtain independent legal advice.