Directors have been given a temporary reprieve from the risk of personal liability for their companies’ insolvent trading due to temporary amendments to insolvency laws because of COVID-19.
However, this temporary relief only applies to debts incurred in the ordinary course of business between 25 March 2020 and 25 September 2020.
The temporary relief is not a licence to rack up company debt.
To rely on the relief, directors will carefully need to consider whether the debts are incurred in the ordinary course of business. A debt is incurred in the ordinary course of business if it is necessary to facilitate the continuation of the business during this period. Of course, this is open to interpretation. The explanatory memorandum to the legislation provides the following examples:
- a director taking out a loan to move some business operations online; or
- debts incurred through continuing to pay employees.
A director wishing to rely upon these temporary safe harbour provisions bears the onus of proving that the debts were incurred in the ordinary course of business.
It is also important to remember that the temporary relief does not affect other potential claims under the Corporations Act – for example, a claim against a director for breaching their duties to the company under sections 180 to 182 of the Corporations Act (CA), claims against directors for unreasonable director related transactions under s588FDA of the CA, unfair preferences under s588FA of the CA, or uncommercial transactions under s588FB of the CA.
Directors should therefore promptly seek professional advice from a legal and/or insolvency advisor to ensure that any debts incurred in reliance on these temporary safe harbour laws are appropriate.
Directors too should bear in mind that this temporary relief will end after 25 September 2020 when these safe harbour protections will revert to normal. It is therefore vital that companies have a properly formulated recovery plan so that directors can potentially take advantage of the existing safe harbour regime when these temporary safe harbour laws come to an end.
All signs are currently pointing to an economic bloodbath come the end of September. Your best chance of ensuring your company’s survival is to seek appropriate expert advice from a legal and/or insolvency practitioner – because Every Move Matters!