With the 25 September 2020 end date for the Federal Government’s reprieve on director’s insolvent trading laws looming, and many Australian businesses now feeling the pressure of operating in the ‘new normal’, it is now more important than ever for Directors to understand their rights and obligations under the temporary relief and to adequately prepare for its conclusion.
What is insolvent trading and the ‘old safe harbour laws’?
A company is considered to be insolvent under Australian law when it is unable to pay its debts as and when they fall due and payable.
Importantly Section 588G of the Corporations Act 2001 (Cth) (Corporations Act) provides that a company director can be personally liable for debts the company incurs if at that time, “reasonable grounds” could make directors suspect the company was already insolvent or would be insolvent due to this debt being incurred. This can expose a director to a range of serious civil and criminal penalties.
In recent years provisions in the Corporations Act, commonly referred to as the safe harbour provisions were enacted so that if (and subject to certain conditions being met) after the director starts to suspect a company is or may become insolvent, the director starts to develop one or more courses of action that are reasonably likely to lead to reasonably likely to lead to a better outcome for the company than administration or liquidation they will not be able to be pursued for insolvent trading for debts incurred that directly or indirectly relate to that course of action.
Please note that there are a number of important conditions that need to be met to enliven the safe harbour protections which are not covered in this article. Please reach out to us to discuss these if they are relevant to you.
What are the temporary ‘safe harbour’ relief measures currently in place and how do they differ from the ‘old safe harbour’?
Under the Coronavirus Economic Response Package Omnibus Act 2020 (Relief Act) a new section 588GAAA has been inserted in the Corporations Act. In short this temporary legislation provides relief for directors (without an obligation to comply with the ‘old safe harbour requirements) from personal liability for debts incurred when trading while insolvent where the debt is incurred:
- in the ordinary course of the company’s business;
- during the six month period starting 25 March 2020; and
- before the appointment during this period of an administrator or liquidator.
This relief can provide much comfort to Directors who continue to trade in the ordinary course and hope to ride out the COVID-19 pandemic wave. If however the debts a company is incurring extend beyond the ordinary course of business then the director will need to consider complying with ‘old safe harbour’ which provides a broader protection for debts but has a number of requirements.
What is not relieved under the changes?
It is vitally important for directors to recognise that their directors statutory and common law duties (for example to act in good faith and in the company’s best interests) are not relieved under the temporary measures and ultimately the relief cannot be used to continue to trade a financially distressed company with no prospects of the company continuing a viable business.
Other changes to statutory demands and bankruptcy notices
The Relief Act has also brought with it temporary changes to the debt threshold and time limits placed on Statutory Demands and Bankruptcy Notices issued after 25 March 2020. In summary, these changes are as follows:
For Statutory Demands the debt threshold has been increased from $2,000 to $20,000 and the timeframe for payment to be made has been increased from 21 days to 6 months.
For Bankruptcy notices, the Judgment debt threshold has been increased from $5,000 to $20,000 and the time for payment has also been extended from 21 days to 6 months.
For specific information about your situation please contact us to find out more.
DISCLAIMER: This article is intended to provide general information and should not be relied upon as legal advice. Formal legal advice should be sought if you are concerned about, or require particular advice applicable to your specific circumstances in relation to, any topics covered in this article.