In response to the COVID 19 pandemic the Federal Government has introduced temporary amendments to safe harbour provisions in the Corporations Act 2001. A new section 588GAAA has been added which provides temporary relief for directors in relation to personal liability for insolvent trading absent dishonesty or fraud.
These new provisions apply to debts incurred by a company ‘in the ordinary course of business’ for a period of 6 months, commencing on 25th March 2020.
What would a debt incurred in the ordinary course of business look like?
It is not clear which debts will be regarded as being incurred ‘in the ordinary course of business’ however examples in the Explanatory Memorandum to the Coronavirus Economic Response Package Omnibus Bill 2020 include;
- a director taking out a loan to move some business operations online; or,
- debts incurred through continuing to pay employees during the Coronavirus pandemic.
Whether a particular course of action taken is to be regarded as within the ordinary course of business will depend on the specific business and their circumstances.
In the current climate it would make sense for businesses to prepare a plan which meets many of the requirements of the existing 2017 Safe Harbour provisions.
2017 Safe Harbour
To obtain the benefit of the 2017 Safe Harbour provisions, directors must be able to demonstrate that the course of action adopted by the company is reasonably likely to lead to a better outcome than the immediate appointment of an administrator or liquidator. To do this, directors should ensure the intended course of action is in the form of a written plan.
The Act provides that the following factors in relation to a director’s conduct may be taken into account when deciding if a course of action taken is likely to lead to a better outcome:
- whether the director has properly informed themselves of the financial position of the company; or,
- whether the director is taking appropriate steps to prevent any misconduct by officers or employees of the company that could adversely affect the company’s ability to pay all its debts; or,
- whether the director is taking appropriate steps to ensure that the company is keeping appropriate financial records; or,
- whether the director is obtaining advice from a qualified person (such as a legal professional or lawyer) who was given sufficient information to give the appropriate advice; or,
- is developing or implementing a plan for restructuring the company to improve its financial position.
Developing and implementing a course of action
Directors should ensure that a course of action developed is documented so that they will be able to prove that actions taken are in accordance with a plan that is compliant with the safe harbour regime.
Regular board meetings should also be held during this time to ensure that the plan is being followed, and amended where necessary to take into account external influences on the business such as increasing government restrictions, additional fiscal stimulus measures, contractual performance issues, supply chain disruption and market disruption in the wake of COVID-19.
The temporary relief of the new safe harbour provision does not affect the existing duties and liabilities of directors so they must continue to be vigilant in identifying and dealing with the issues that confront the businesses in these challenging times.
If you have questions in relation to how the safe harbour regime might apply to you and your business, or require advice on director duties, please contact a lawyer in Coleman Greig’s Commercial Advice team, who would be more than happy to assist you.
Disclaimer; This information is for information purposes only and is not legal advice. You should obtain advice that is specific to your circumstances and not rely on this publication as legal advice. Please contact us if you wish for us to advise you on any issue you may have in your particular circumstances.
