To help keep businesses in business throughout the COVID 19 pandemic, the Federal Government has put in place a significant number of temporary measures. Under one of those measures, the Government has amended the Corporations Act to give companies an additional ‘Safe Harbour’ mechanism that will apply for the next 6 months, becoming known as the COVID Safe Harbour.
The usual state of play
In normal times, a company will be insolvent if it can’t pay its debt. Under the Corporations Law, a director has a duty to ensure that a company doesn’t become insolvent, or trades while insolvent. If they do, the director may be personally liable for any debt incurred by the Company.
A director also has a duty to consider the interests of a creditor, especially if the company is struggling financially.
Given the immense economic disruptions caused by COVID 19, the Government has introduced changes to this status quo and these changes will apply for 6 months starting on 25 March 2020.
What are the changes exactly
The COVID Safe Harbour changes mean that:
- directors may be relieved from personal liability for debt incurred when the business was trading while insolvent. There are limiting conditions to this:
- the debt must have been incurred after 25 March 2020,
- in the ordinary course of business, and
- before any administrator was appointed.
- the minimum threshold for creditors to issue a statutory demand has increased from $2,000 to $20,000.
- if a company does receive a statutory demand they now have 6 months to respond, rather than the usual 21 days.
These changes will apply for 6 months from 25 March 2020.
Critically, these changes give companies time to help manage the risks to their businesses and to prepare and implement a strategy that can assist them in trade through this pandemic.
It’s also worth noting that these measures do not alleviate directors from their general director’s duties, and directors should still ensure they are meeting those obligations.
What does in the ordinary course of business mean?
Helpfully, the Government has given some guidance to businesses, stating that a debt is in the ordinary course of business if it’s necessary to facilitate the continuation of the business during the 6 months from 25 March 2020. Some examples include taking out a loan so the business has enough money to pay staff over the next 6 months or to borrow to invest in technology so the business, or part of it, can move online.
What about the existing Safe Harbour provisions?
The existing Safe Harbour provisions were introduced in 2017 and gave directors protection from insolvent trading if they were able to develop a viable alternative strategy to appointing an administrator or liquidator.
A director is not liable for insolvent trading for any of the costs incurred directly or indirectly with the alternative strategy, so long as the strategy is being actioned.
A proviso of the provision is that the directors must demonstrate that the alternative plan is reasonably likely to result in a better outcome for the company.
Both Safe Harbour provisions are important
It would be wise for companies to utilise both of the Safe Harbour provisions. For example, a company can take advantage of the COVID 19 Safe Harbour mechanism to give themselves breathing space to develop a viable plan.
The company can then rely on the existing Safe Harbour measures while they implement the plan.
Relying on both measures also gives companies a wider scope in the types of costs that may be covered. For example, if one cost may not be considered in the ordinary course of business under the COVID 19 Safe Harbour provisions, it may be covered under the existing Safe Harbour provisions
What does this mean for creditors or terms of trade?
These changes will likely lead to a significant drop in creditors using statutory demands over the coming months. However, be mindful that these changes do not prevent a creditor seeking other avenues to try to recover the debt, such as taking action through the courts to wind up a company.
It’s also worth noting that these changes may place increased pressure on creditors and suppliers which could lead some to change their trading terms. It’s likely to make it more difficult for creditors to recover outstanding debts.
Keeping this in mind, businesses may wish to adjust their trading terms to address this risk and to do more due diligence when entering into arrangements with new trading partners, to reduce the risk they may end up with outstanding bills themselves.
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Other relevant articles:
- Coronavirus: Implications on commercial contracts and force majeure clauses
- COVID19 and Hurdles to Stand Downs
- Coronavirus Employment Law Update – Leave and Stand Downs – Aspect Legal
- Coronavirus: Workplace Health and Safety Considerations
Relevant Podcast Episode:
- [EP 099] Coronavirus Implications on Commercial Contracts and Force Majeure Clauses
- [EP 0131] Foreign investments, the FIRB approval process and changes in the face of COVID
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