News & Insights

The COVID-19 outbreak, declared a pandemic by the World Health Organization, is presenting new and unprecedented challenges for businesses across the globe, including in Australia. Challenging trading conditions are bringing into sharp relief the duty of directors to avoid trading whilst the company is insolvent. The safe harbour provisions in the Corporations Act 2001 (Cth) provide an opportunity for directors to weather the storm, whilst avoiding personal liability for insolvent trading. Macpherson Kelley is well placed to provide advice to directors about their duties and obligations and their ability to steer the ship into the safe harbour.

The challenges presented by COVID-19 are now having a real effect on a number of matters across our offices. Anecdotally, we have seen requests for advice about obligations to employees, parties to contracts and cases citing the impact of COVID-19 as a basis for being unable to meet contractual obligations, court timetables and, in the insolvency space, directors citing the impact of COVID-19 as a reason for the need to appoint an external administrator.

There seems little doubt, at least in the short term, that the negative impacts of COVID-19 on business conditions will increase. Within the business community there are genuine concerns around the inadequacy of working capital reserves to meet any downturn in trade for a considerable period and, in turn, the ongoing ability of businesses to meet creditors, and maintain solvency over the coming weeks and months

These concerns weigh particularly heavily on directors, who have personal liability if they continue to trade a company whilst it is insolvent.

In late 2017, section 588GA was introduced into the Corporations Act 2001(Cth), creating a “safe harbour” for directors which, once accessed, provides an exception to their duty to prevent insolvent trading.

In order to access the safe harbour, a director must:

• after starting to suspect the company is or may become insolvent, start to develop one or more courses of action that are reasonably likely to lead to a better outcome for creditors;
• ensure that the company is substantially compliant in paying entitlements of employees at the time they fall due; and
• ensure the company is substantially compliant in lodging all tax related documents by the time they are due for lodgement.

The safe harbour will protect the director from liability for insolvent trading in respect of debts incurred directly or indirectly in connection with the course of action. However, a director will not have the benefit of the safe harbour if there is a failure to pay entitlements of employees when they fall due, or a failure to lodge tax related documents, and the failure is one of two or more such failures in the 12 months before the debt in question is incurred by the company.

Whilst care must be taken to ensure that the criteria for accessing the safe harbour are met, the safe harbour can provide directors with an opportunity to trade their business through a challenging period, such as the challenges presented by COVID-19, without the need for a formal insolvency appointment. This can have the benefit of maintaining enterprise value and provide directors with sufficient comfort to remain on the board, providing stability at a difficult time.

If you are experiencing difficulties in your business, we are able to advise on your options as a director, including your ability to access the safe harbour.

The information contained in this article is general in nature and cannot be relied on as legal advice nor does it create an engagement. Please contact one of our lawyers listed above for advice about your specific situation.