The Coronavirus Economic Response Package Omnibus was recently introduced providing extended safe harbour for directors during COVID-19. A director is a person employed as an officer of a company and has a duty to manage the affairs of the company. One of those duties includes ensuring that the company does not trade whilst insolvent.
A company is insolvent if it is unable to pay its debts when they become due.
If a director fails in this duty and allows the company to continue to trade whilst insolvent, the director can become personally liable for those debts of the company which were incurred whilst it was insolvent.
In 2017, The Safe Harbour regime was introduced to provide directors with relief from liability under the Corporations Act 2001, where the company was undertaking a restructure outside formal insolvency procedures. The Safe Harbour was designed to encourage directors to think creatively to save their businesses and companies rather than fall on the sword of liquidation.
Prior to the COVID-19 pandemic, safe harbour relieved directors from personal liability in the following circumstances:
- After the director started to suspect that the company may become or be insolvent, the director developed courses of action, reasonably likely to lead to a better outcome than the immediate appointment of a liquidator or administrator;
- Debts were incurred directly or indirectly in connection with that course of action during the relevant period; and
- The company was meeting other threshold requirements such as paying employee entitlements and complying with tax reporting obligations.
On 24 March 2020 the Australian Federal Government enacted the Coronavirus Economic Response Package Omnibus Act.
The Omnibus Act is designed to provide a safety net and extends the safe harbour relief to directors for all debts incurred by a company in the ordinary course of its business, for a period of 6 months from 25 March 2020. The same relief has been extended to holding companies for insolvent trading by their subsidiaries: section 588WA (1) Corporations Act 2001. At the time of writing, the 6 month period ends on 24 September 2020.
These provisions do not act retrospectively.
A debt incurred in the ordinary course of business will be captured if “it is necessary to facilitate the continuation of the business during the six month period”. The incurred debts do not need to relate to a specific plan and the amendments are designed to encourage directors to ensure the business continues to trade through the 6 month period.
The new temporary safe harbour provisions have not yet been tested by the Courts, but it is generally felt that if a director finds an alternative revenue stream which utilises the same or a similar cost base, then those debts will be considered to have arisen ‘in the ordinary course of business’.
For example: a traditional bricks and mortar restaurant which develops a new on-line take-away website or invests in a new delivery app, is more likely to fall within the definition of ‘ordinary course of business’. In contrast if the restaurant moved to a very different new venture, such as interior decorating for example, then those incurred debts may not be captured as being in the ordinary course of business.
Other general duties of a director to a company remain unchanged.
Please contact our office (07) 3225 5600 to discuss whether the new safe harbour laws may apply to you.