COVID-19 – Temporary protection from insolvent trading
On 24 March a new section was introduced into the Corporations Act 2001 (Cth) (588GAAA) that would temporarily protect company directors from personal liability for insolvent trading.
The amendment provides a new safe harbour from the directors’ duty to prevent insolvent trading, and was introduced in response to the growing number of businesses facing insolvency as a direct result of the economic effects of COVID-19.
Under the amendments, companies that may be at risk of insolvency in the wake of COVID-19 can continue to operate and incur debts ‘in the ordinary course of the company’s business’, without the fear of being punished for insolvent trading.
The safe harbour will be effective for six months.
To be able to rely on these measures, the debt incurred must be incurred:
- In the ordinary course of the company’s business;
- During the six-month period commencing from 25 March 2020; and
- Before any appointment of an administrator or liquidator during the temporary safe harbour application period.
- Act in the best interests of the company as a whole;
- Act with care, diligence and good faith; and
- Do not use their position or information obtained as a director to gain an advantage or cause detriment to the company.
Identifying Insolvent Trading
- A person is a director at the time a company incurs a debt;
- The company is insolvent at the time of incurring the debt or becomes insolvent because of incurring the debt;
- At the time the debt was incurred, there were reasonable grounds to suspect that the company was insolvent;
- The director was aware such grounds for suspicion existed; and
- A reasonable person in a like position would have been so aware.
Consequences of Insolvent Trading
Defending against Insolvent Trading
- The director had reasonable grounds to expect, and did expect, that the company was solvent and would remain solvent even if it incurred debt;
- The director had reasonable grounds to believe, and did believe, that a competent and reliable person who was responsible for providing adequate information about the company’s solvency was fulfilling that responsibility – in other words, if the director received information they believed to be credible that the company was, and would remain, solvent even if it incurred the debt;
- Illness or other good reason caused a director to not take part in the management of the company at that time; or
- The director took all reasonable steps to prevent the company incurring the debt.