The COVID-19 pandemic is making it difficult for many businesses to stay financially viable. As a business director, you may be concerned about risking an insolvent trading claim if your business is incurring debt. Or, if safe harbour provisions are at play, an alleged breach of duties.
The Federal Government made temporary changes to the safe harbour provisions in March 2020. These were designed to help manage the effects of the pandemic. You may be unsure how long these changes will remain in force and their effect on your interests.
If your business is taking on debt, you need to have a clear and viable plan that will facilitate your business's continuation. You should also consider your risk exposure and general obligations, and implement protections to insolvent trading claims.
This article explains:
- the safe harbour regime;
- temporary changes made to the safe harbour regime;
- what may prevent you from relying on this regime; and
- whether your obligations as a director have changed.
The Safe Harbour Regime
The safe harbour regime was introduced in 2016. It protects directors who are making decisions at times of financial difficulty for their company. In particular, if a director incurs debt that is 'reasonably likely to lead to a better outcome for their company and its creditors' than going into voluntary administration and/or liquidation.
Directors can utilise the protection as a defence if their company goes into liquidation and a liquidator seeks to pursue a claim against them for insolvent trading.
Directors' Duties Complete Guide
If you are a company director, complying with directors' duties are core to adhering to corporate governance laws. This guide will help you understand the directors' duties that apply to you within the Australian corporate law framework.
What Changes Were Made to the Safe Harbour Regime?
Temporary extensions were made to the regime due to COVID-19. The extension provides directors with protections for:
- debts that are 'reasonably likely to lead to a better outcome for their company and its creditors', and
- debts the company incurs in the ordinary course of business from 25 March 2020 for the following six months (until 25 September 2020).
In order to meet the requirements of the extended safe harbour provision, the debt must:
- be incurred by the company in the six months, on or from 25 March 2020;
- be incurred before any appointment of an administrator or liquidator; and
- be necessary to facilitate the continuation of the business.
Debts incurred in order to keep the business afloat are regarded as a debt incurred in the business' ordinary course of operation. e.g. debts incurred to pay wages and take the business' operations online may meet the criteria.
Leveraging the Safe Harbour Provisions
Directors who are making decisions while their businesses are in financial distress may be protected by the safe harbour provision extensions. This protection reduces the risk of exposure to personal liability for a claim of insolvent trading.
The extension incentivises directors to continue trading when they might ordinarily be uncomfortable with the risk exposure, and more likely to enter into voluntary administration or liquidation.
If your company is seeking to incur debts during the pandemic ensure any related decisions are:
- made in the ordinary course of business, so you avail yourself of the extended safe harbour provision; or
- fit the criteria of the initial safe harbour provision, which remains in place.
Make sure you have a clear and viable plan that will facilitate your business' continuation when taking on debt in these instances. Also, keep clear records of why and how the decisions were made. As a director seeking to utilise these provisions, you will be required to provide evidence should you need to use the safe harbour protection.
Ultimately, as a director you should consider your obligations to act with care and diligence and obtain advice prior to entering into commitments which may expose you to a claim of insolvent trading in the future.
Once the temporary expansion of the safe harbour provision ends on 25 September 2020, you still have the prevailing safe harbour provision to fall back on as a director when deciding upon a restructuring pathway.
What Prevents Me From Relying on the Safe Harbour Regime?
As a director, you may not be entitled to rely on the safe harbour regime's protections unless your company has:
- paid all its employees their entitlements; and
- complied with its tax obligations.
Have My Director Obligations Changed Since COVID-19?
Your duties as a director of a company have not changed.
The safe harbour provision has been temporarily extended, potentially protecting you against a claim of insolvent trading. However, your duties to act in the best interests of the company, including in the interests of shareholders, remain. Your duty to act with care, diligence and good faith is important in the current climate.
If your company goes into liquidation, then a liquidator may scrutinise your decisions as a director if they show a clear lack of consideration and an indifference to your duties. As a director, you could also be personally liable if you have acted in a fraudulent and dishonest manner.
Directors are not the only people exposed to these duties. A company's officers, people who have the ability to affect the financial standing of the company, may also be subject to these duties.
Key Takeaways
The existing safe harbour regime will remain in place post 25 September 2020. However, the temporary extensions designed to help companies continuing to trade through the pandemic will stop. As a director, it is important that you seek appropriate advice, keep records and make decisions with your duties. This will reduce the risk of exposure to a claim by a liquidator for insolvent trading, should your company be placed into the hands of an Administrator or Liquidator.
If your company is struggling to remain financially viable and facing insolvency, we are able to assist by guiding you through these processes. It is important to understand your obligations, options and rights. If you need assistance in relation to insolvency.
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.
