UPDATE 7 September 2020 – The Treasurer and Attorney General have announced this morning that the Federal Government will extend the temporary relief for directors from personal liability for trading while insolvent until 31 December 2020. Bearing this in mind, directors should consider if the extension impacts them or how their board makes decisions and seek appropriate advice to formulate a plan of action if necessary.
Unless otherwise extended by the Government, the temporary “safe harbour” from insolvent trading is due to end on 25 September 2020, potentially leaving directors exposed to a breach of section 588G of the Corporations Act 2001 (Cth) (the Act). Section 588G of the Act imposes a duty on a director to prevent the company from incurring a debt where there are reasonable grounds for suspecting the company is, or would become, insolvent. Where a director is found to have breached this duty, they can be personally liable for the debts incurred by the company while insolvent.
We previously wrote an article which, among other things, outlined the insolvent trading relief available under section 588GA of the Act (Existing Safe Harbour) and the new temporary “safe harbour” under section 588GAAA of the Act (Temporary Safe Harbour).
We recommend that directors review that article (here), as it sets out the key differences between the Existing Safe Harbour and the Temporary Safe Harbour, as well as making a number of pertinent observations for directors.
Notably, relief under the Existing Safe Harbour is contingent upon directors having begun to develop a course of action which is reasonably likely to lead to a better outcome for the company. It is therefore crucial that directors consider now, the future financial position of the company, having regard to any change in circumstances which may eventuate over the coming months.
For example, as September approaches, a number of the government relief initiatives are set to either end or fundamentally change. This includes the JobKeeper payment and ATO lodgement deferrals. It is very likely that a number of companies (in some capacity) are relying on these initiatives to support their current financial position. It is therefore crucial that directors consider now the impact that these changes will have for their business and whether they are at risk of experiencing financial distress.
This is a complex area of the law and the risk of personal liability is very real. We make the following suggestions for directors, and particularly those who may be concerned about solvency:
- Understand that the threshold of personal risk taken on by a director is substantially increased as a company approaches insolvency. Directors have a duty to consider the interests of the company, monitor the financial position of the company and to consider the interests of creditors.
- Be aware that any relief under the Existing Safe Harbour (should it be available) will only apply to those debts which have been incurred after a course of action is being developed. “Waiting to see what happens” come 25 September 2020 may be too late.
- Adhere to good corporate governance practices, which includes maintaining appropriate and complete records and keeping regular board minutes.
- Remember that the other directors’ duties remain in force and any safe harbour will not provide protection for a breach of those duties. Our recent article made key observations for directors about the duty of care and diligence in the current market.
- Between now and 25 September 2020, directors should be seeking appropriate and timely advice from lawyers and financial advisors, who, to mitigate the risk of exposure, will be able to assist to develop a plan and course of action.
We are yet to see whether the Government will succumb to pressure from industry to extend the Temporary Safe Harbour beyond 25 September 2020. In any case, even if the measures were to be extended, our advice remains the same. Directors should act diligently now and get their house in order.
Our specialist Corporate team regularly assist and advise public and private company directors on a wide range of issues, including directors’ duties, corporate structuring and strategic governance. Contact James Stevenson, Consultant and Andrew Windybank, Principal with any queries.
This article was co-written by Paralegal, Emily Taylor.
This article is not legal advice. It is intended to provide commentary and general information only. Access to this article does not entitle you to rely on it as legal advice. You should obtain formal legal advice specific to your own situation. Please contact us if you require advice on matters covered by this article.
Photo – Andrew Windybank, Steadfast, French Pass, NZ.