With the economic impact of COVID-19 reaching almost all sectors of the Australian economy, directors should take time to consider their obligations in relation to insolvent trading.
Insolvency is a situation where a company is not able to pay its debts as and when they fall due. Ordinarily, a director is under a duty to prevent the company from incurring debts when the director has reasonable grounds to suspect the company is (or may soon become) insolvent. Failure to do so may result in a director being held personally liable for those debts and pursuit of a claim against the director for insolvent trading.
What are Safe Harbour Provisions?
Safe Harbour Provisions were enacted in 2017 to protect directors from personal liability for insolvent trading claims whilst pursuing a reasonable course of action to turn around their companies and achieve a better outcome than would be achieved by appointment of an administrator or liquidator. Generally speaking, debts incurred by the company 'directly or indirectly in connection with that course of action' are excluded from the directors' liability for insolvent trading.
On 23 March 2020, the Federal Government extended these provisions by way of a new section 588GAAA of the Corporations Act 2001. The amendments are temporary, and provide that a director will not be personally liable for insolvent trading in respect of a debt incurred:
in the ordinary course of the company’s business; and
during the six-month period from 25 March 2020 (or any longer period prescribed by the regulations)
There is no clear definition of ‘in the ordinary course of business’, though the Explanatory Memorandum provides that it will include debts:
“necessary to facilitate the continuation of the business… This could include, for example, a director taking out a loan to move some business operations online. It could also include debts incurred through continuing to pay employees during the Coronavirus pandemic.”
The evidential burden will be on directors to prove that debts were incurred ‘in the ordinary course of business’. For the purposes of the temporary safe harbour provisions, the director must be able to adduce or point to evidence that “suggests a reasonable possibility that the matter exists or does not exist.”
What should I do if I have concerns regarding the solvency of my business?
Directors need to be aware that the COVID Safe Harbour provisions are temporary. If you have concerns regarding the long-term solvency of your company you should:
a) seek financial advice for the company, which may include advice regarding your company’s entitlements to financial relief under COVID Stimulus packages;
b) ensure company records are complete and up-to-date including board minutes, particularly with reference to debts incurred by the company which are considered ‘necessary to facilitate the continuation of the business’;
c) review your existing arrangements with creditors, and see if favourable payment terms can be negotiated;
d) formulate a strategy with your financial and legal advisors that continues post-COVID, to ensure that if your company is in financial difficulty after the expiry of the COVID Safe Harbour, you may nevertheless be eligible for protection under the general Safe Harbour Provisions (which are more onerous).
Terri Bell & Co can provide assistance to directors and companies in navigating Safe Harbour Provisions, and work with your financial advisors to answer any questions you may have regarding how the new provisions may assist your business during the Covid-19 pandemic. If you have any questions, please contact Terri Bell or Ellie Wolfenden on firstname.lastname@example.org or 9191 9856.
IMPORTANT NOTICE - The information contained in this article is not intended to be comprehensive. It is general in nature and is not intended to be used as a substitute for legal, financial or other professional advice. You must seek specific professional advice tailored to your personal circumstances before taking any action based on this article.
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