Economic Response Package Omnibus Act 2020 (Cth) (Omnibus Act)
The Omnibus Act, recently enacted by the Federal Government as part of its response to the COVID-19 crisis, inserts section 588GAAA into the Corporations Act 2001 (Cth) (Corps Act)1 which, in effect, provides a temporary relief for directors from their duty to prevent insolvent trading for a period of 6 months from 25 March 2020 (unless extended). Section 588GAAA of the Corps Act provides a COVID-19 responsive 'safe harbour' (COVID Safe Harbour) which is different, but complimentary, to the 'safe harbour' regime that is otherwise operative in section 588GA of the Corps Act.
Directors will be able to rely on the COVID Safe Harbour in relation to a debt incurred by the company if the debt is incurred:
- in the 'ordinary course of the company's business';
- during the six-month period from 25 March 2020 (unless extended); and
- before any appointment of an administrator or liquidator to the company.
Importantly, and essential to an understanding of the COVID Safe Harbour, is the evidential burden prescribed in section 588GAAA, which rests with the person seeking to rely upon the provision.
COVID Safe Harbour
The key considerations for directors seeking to rely upon the COVID Safe Harbour are that:
- You should carefully consider whether the incurrence of debts referrable to employee entitlements or taxation liabilities will be considered in the 'ordinary course of the company's business'. Employee entitlements or taxation liabilities are not likely to be considered debts in the 'ordinary course of the company's business' if they are not paid as and when they fall due. Further, you should also be alive to the personal implications for seeking to characterise employee entitlements and taxation liabilities in this manner due to the likelihood of 'Director Penalty Notices' being issued for such amounts.
- You should carefully consider whether you are discharging your directors' duties in incurring debts, as your obligations under the Corps Act still apply2. There is an objective standard that applies to the degree of care and diligence. Contraventions of directors' duties are civil penalty provisions, which can result in directors being ordered to pay a pecuniary penalty up to $200,0003 and compensation to the company for damages suffered4, and being disqualified from acting as a director of a company. This may be an important consideration for the availability (or otherwise) of any Directors & Officers or Management Liability Insurance Policies.
- You bear the evidential burden in relation to incurring debts. Section 588GA of the Corps Act provides some useful guidance, by analogy, of some considerations that will enliven the COVID Safe Harbour:
- Be properly informed of the company's financial position;
- Maintain financial records consistent with the size and nature of the company;
- Take appropriate steps to prevent any misconduct by officers or employees of the company that could impact on the company's ability to pay its debts; and
- Obtain advice from 'appropriately qualified' persons who have been provided with sufficient information to give appropriate advice or develop/implanting a COVID Safe Harbour plan for restructuring the company to improve its financial position.
COVID Safe Harbour advisory services
Our team works collaboratively with specialist professionals such as chartered accountants and liquidators to provide a comprehensive, responsive and practical service incorporating:
- restructuring and turnaround services
- business 'financial health' assessments and their legal implications
- assistance with engaging the COVID-19 Safe Harbour
- providing guidance and 'breathing room' in the face of COVID-19 hardships
1 Economic Response Package Omnibus Act 2020 (Cth), see Schedule 12, Parts 2 and 3;
2 Directors must discharge their duties in 'good faith' for the best interests of the corporation, for a 'proper purpose' and directors must not improperly use their position to gain an advantage for themselves, someone else or cause detriment to the corporation: ss 180-182 Corps Act.
3 Section 1317G Corps Act taking into account statutory factors.
4 Section 1317H Corps Act.
5 Section 206C(1) Corps Act.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.