20 May 2020
Covid19 has seen sudden and unforeseen changes to the way in which business is conducted in Australia and globally. We have seen some businesses readily adapt and transition into new ways of trading, but others have been left feeling the financial crush of no longer able to continue as “business as usual” for the foreseeable future. As a result, many companies and directors are having to consider the operation of the insolvent trading provisions, and specifically the “safe harbour” provisions of the Corporations Act 2001 (Cth) (“the Act”).
Temporary amendments to legislation impacting companies has evolved seemingly on a daily basis. Accordingly, it is more important now than ever before for directors to keep abreast of these critical changes given the effects to their personal liability.
This article briefly summarises the recent changes to the safe harbour provisions ensuring directors are:
Existing Safe Harbour Provisions – Section 588GA of the Corporations Act 2001 (Cth)
The existing safe harbour provisions outlined in section 588GA of the Corporations Act 2001 (Cth) (“the Act”) provide protection for directors in their taking a course of action reasonably likely to lead to a better outcome for a company. In order for the safe harbour to apply, the debt incurred by the company needs to be ‘directly or indirectly’ in connection with that course of action taken by the director.
Importantly, the reasonableness of a course of action is to be considered contextually. However, the factors likely to be taken into consideration by a Court in determining the reasonableness include but are not limited to steps taken to:
Critically, directors may not be able to rely on the safe harbour provisions in section 588GA of the Act if at the time the debt is incurred the Company is in arrears of its usual obligations including its taxation reporting obligations and/or employee entitlements.
Coronavirus Economic Response Package Omnibus Act 2020 (Cth) (COVID Act) (“the CERPO Act”)
The introduction of the Coronavirus Economic Response Package Omnibus Act 2020 (Cth) (COVID Act) (“the CERPO Act”) has bolstered the existing safe harbour provisions.
The CERPO Act has temporarily amended the safe harbour provisions for company directors and the duty to prevent insolvent trading. Effective from 25 March 2020, section 588GAAA of the CERPO Act now provides an additional ‘safe harbour’ from insolvent trading liabilities for debts that were incurred during the 6 months beginning 25 March 2020 in the ordinary course of the company’s business.
This additional measure will provide much needed relief and reprieve to company’s and their directors dealing with unprecedented changes to business and operating conditions and provides an attractive opportunity of time to properly assess a company’s financial position before otherwise pursing an insolvency administration.
What does this change look like in practice?
The introduction of this temporary measure is by no means a “green light” for directors to engage in or undertake transactions or risks.
It has been introduced specifically to protect necessary transactions or debts incurred to “…facilitate the continuation of the business during the six month period…”. This means, the protection only presently lasts from 25 March 2020 to 25 September 2020.
Whilst it is unclear as to exactly what will constitute a debt incurred “in the ordinary course of business”, the explanatory memorandum implies that the “ordinary course” may be considered widely and more broadly than before: that is to say, it could capture diversifying outside existing operations (for example production of new products). Further examples include loans taken out to facilitate continued operations, introduce/streamline technological integration, adapt production processes and/or pay employees will likely fall within the scope of the new temporary measures.
Importantly, these new temporary measures differ from existing safe harbour protections in that the exemption from insolvent trading is not preconditioned on the compliance with taxation reporting lodgements or employee entitlements being up to date. However, it is clear that the evidentiary burden of proving the debt will rest squarely with directors to demonstrate whether the debt(s) were reasonably incurred
Duties and penalties to remain
Notwithstanding these measures, directors must be mindful that:
Considering utilising the Safe Harbour Provisions
It is clear that this provision has been introduced to provide avenues or options to companies and their directors facing times of financial uncertainty, who would otherwise be faced with having to make decisions on more serious measures including voluntary administration or liquidation.
However, reliance on these safe harbour provisions should be used only in appropriate circumstances. Transactions during the temporary period should only be undertaken with reference to proper financial and legal advice.
If you are a company director considering using the safe harbour provisions, we strongly urge you to seek timely legal advice, before entering the transaction or incurring any debt.
How we can help you
JHK Legal’s insolvency team can assist in respect of all changes to the Corporations Act (Cth) 2001 and all associated legislation, including advising on transactions and referring to reputable advisors. If you consider this advice relevant to your circumstances, please call us on 07 3859 4500 or Contact us to discuss how we may be able to assist.
Written by Kate Witt, Lawyer