Since 2017, company directors have had the benefit of a safe harbour protection from insolvent trading claims and personal liability due to the passing of the Treasury Laws Amendment (2017 enterprise Incentives No. 2) Bill. The Bill, subject to important conditions, allows a company director to pursue plans to restructure an insolvent business to improve its financial position, without the need to appoint a voluntary administrator. This is provided the turnaround and/or restructure is likely to result in a better outcome than immediately appointing a voluntary administrator or liquidator.
On 24 March 2020, the Australian Government introduced new temporary safe harbour protection from liability for insolvent trading in response to the COVID-19 pandemic by way of the Coronavirus Economic Response Package Omnibus Bill 2020. This applies to debts incurred by the company in the ordinary course of its businesses on or after 25 March 2020 and for a period of at least 6 months.
With the Australian Government’s tight social distancing restrictions and unprecedented changes in the economy, many company directors find themselves scrambling to come to terms with how these changes will impact their business and how to take advantage of relief measures to offset these impacts. If you’re currently dealing with these challenges and experiencing severe financial distress, the new temporary safe harbour protection measures may help your company survive. However, the temporary relief does not extend to relief from criminal prosecution for reckless insolvent trading, or from statutory and common law director duties. If your business’ future is uncertain, you must therefore seek qualified advice from a professional.
What are the Changes to Safe Harbour Protection?
The Australian Government’s third measure of Schedule 12 of the Coronavirus Economic Response Package Omnibus Act 2020 (Omnibus Act) inserts section 588GAAA into the Corporations Act to create a temporary safe harbour for company directors in response to COVID-19. If a company director breaches their duty to prevent insolvent trading:
- In the ordinary course of the company’s business,
- During the six-month period starting on 25 March 2020 or a longer period that is prescribed by the Regulations, and
- Before any appointment during that period of an administrator, or liquidator, of the company.
Then the director is protected under temporary safe harbour. However, a company director who wishes to rely on the temporary safe harbour protection must provide evidence that they are adhering with the dot points mentioned above.
There are three important features of this amendment, as set out by the Parliament of Australia:
- The Regulations may set out the circumstances in which the temporary safe harbour is taken never to have applied to a person or to a specific debt.
- There is the ability to extend the 6-month timeframe during which the protection of the safe harbour applies by Regulation if required.
- The obligation to prevent insolvent trading is in addition to the general duties of directors (sections 180 to 190C of the Corporations Act). Importantly, they must exercise their powers and discharge their duties in good faith and with the degree of care and diligence that a reasonable person would exercise if they were a director of a company in the company’s circumstances and had the same responsibilities within the company as the director. These duties will remain. A director continuing to incur debts in their company, with no realistic prospect of repaying these debts, now or in future, will not be complying with their duties.
How to Use Safe Harbour Protection During COVID-19
If your company is experiencing severe financial distress due to COVID-19, you need to put an action plan in place as soon as possible to ensure the future survival of your company. With this in mind, it’s important to keep sufficient documentation to support that your actions are being carried out in accordance with the safe harbour legislation.
There are a number of steps you should follow in order to help keep your company afloat. The list below outlines some of these. If you are found to be trading insolvent but have followed/are following the below steps, you may be protected under temporary safe harbour measures.
- Get your company’s accounts and records in order by way of obtaining professional advice from your accountant or a specialist at Revive Financial.
- Adjust your cash flow forecast in expectation of trading impacts that may occur during this period of uncertainty.
- Prepare your company for any internal changes that may be implemented to help keep your business alive – this may include a change in staffing arrangements or a decrease in rent.
- Adjust for the various economic stimulus packages available by Federal and State Governments, including PAYG instalment and withholding refunds, payment deferral options and payroll tax assistance.
- Research the current financial assistance available for businesses by the Australian Bankers Association and adjust accordingly.
- Ensure that your company is able to meet its employee entitlements as and when they fall due.
- Ensure that the company continues to meet its tax reporting obligations.
- Ensure that all debts of the company are incurred directly or indirectly in connection with the action plan.
- Ensure that the outcomes of the plan are to put the company in a better position financially than immediately winding up the company through administration or liquidation.
- Implement a program to monitor that all of the above steps are maintained and updated in line with the safe harbor protection legislation.
You Must Still Comply with Your Director Duties
It is your duty as a director during these challenging times to always act in the best interests of the company. Although these temporary safe harbour protection measures may protect you from personal liability if you are found to be trading insolvent during these uncertain times, you are still required to uphold your key duties and ensure you are not accruing debts your company is unable to pay. Your duties as a director include:
- Being honest and careful in all your dealings,
- Understanding what your company is doing,
- Making sure your company can pay its debts on time,
- Ensuring your company keeps proper financial records,
- Acting in the company’s best interests, even if this conflicts with your personal interests, and
- Using any information only for the good of the company and not to gain an unfair advantage for yourself or others.
Australian businesses have taken a major blow due to the COVID-19 pandemic. It’s important company directors are proactive in assessing their risk and vulnerability from both an operational and financial standpoint – and act decisively to mitigate any issues.
If you can’t meet your debts or your company has been significantly impacted by the COVID-19 crisis, you need to consider your company’s viability to continue trading. If the company is unable to pay its debts on time and continues to accrue debt it can’t afford to pay, you are breaching your duties as a director and should seek professional assistance urgently. Without professional assistance, you may be at risk of becoming personally liable for company debts. In this case, Company Liquidation may be the only option available to deal with company debts and allow you to move on.
Contact Revive Financial Today
Our team at Revive Financial are on-hand to discuss your company’s financial position and help provide a solution to alleviate company debt stress during these uncertain times. If your company has been majorly impacted by COVID-19 and your company debts are out of control, you need to speak to us immediately for professional advice on what to do next. Get in touch with us today on 1800 534 534 for a free 30-minute consultation.