The Federal Government has implemented six-month temporary relief for Directors for any personal liability from trading while insolvent as part of its COVID-19 response package.

Head of the Newcastle Corporate and Commercial Team at Australian Business Lawyers and Advisors (ABLA), Suzie Leask, said the changes provide a welcome breathing space for business owners, directors and boards who are navigating the challenges of financial distress due to COVID-19.

Suzie said that, under the Coronavirus Economic Response Package Omnibus Act 2020, Directors are relieved of personal liability for insolvent trading if a debt is incurred in the ordinary course of the company’s business for six months from 25 March.

The package also includes a temporary change to the rules regarding statutory demands. If a company receives a demand on or after March 25, it has six months to respond rather than the usual 21 days.  Minimum statutory demand amounts have increased to $20,000.

She said under usual insolvent trading laws in the Corporations Act, Directors can be personally liable for debts incurred by the company if there are reasonable grounds to suspect that the company was insolvent or would become insolvent by incurring the debt. An insolvent company is one that is unable to pay its debts when they fall due.

“Every business is different, so the law is not prescriptive, but whether the debt is incurred in the ordinary course of business may be broader in this COVID-19 context than usual legal interpretations,” Suzie said.

“The Explanatory Memorandum to the Act suggests this could include debts incurred through continuing to pay employees during the COVID-19 pandemic or taking out a loan to move some business operations online.”

Suzie said the temporary expansion of the safe harbour defence is less technical, broader in nature and easier to satisfy than the existing regime.

“Unlike the existing safe harbour regime which has a number of mandatory thresholds and requirements, this temporary law provides protection for a broader category of debts and is not confined to actions arising to specifically preserve or restructure the company as it moves closer to insolvency.”

She said this reform is not a free pass. Directors or boards will need to produce evidence such as facts, board minutes and advice from financial advisers and lawyers to show there was a reasonable possibility that the debt was incurred in the ordinary course of business.

“The temporary changes, combined with safe harbour laws introduced in 2017, give Directors more confidence to continue to pay their bills, trade where possible, and retain staff through this crisis without pressure to enter into administration if there is a chance the business is close to insolvency.

“Directors and advisers should apply these temporary relief measures and the existing safe harbour regime on a case by case basis.  Despite the temporary relief measures, if a company is approaching insolvency, case law states that Directors must start to take the interests of creditors into account.”

She said all other director duties continue to apply.

“In the current COVID-19 context, Directors need to make urgent but careful decisions about incurring debt,” she said.

“Directors should exercise due care and diligence when incurring additional liabilities if the organisation’s solvency is questionable and consider the long term impact on business viability.”

Five of Suzie’s tips for Directors to stay on top of changing director liability and governance obligations include:

• Staying informed of your business’ financials and solvency status
• Adhering to good corporate governance and record keeping (including board minutes)
• Checking insurance policies, including business continuity and director and officer insurances
• Having Director Deeds of Indemnity in place
• Reviewing business continuity and business succession plans

ABLA will be hosting a COVID-19 employer update webinar on April 1 at 1:30pm, which you can register for via their site.

They have also produced a FAQ guide to help businesses navigate COVID-19 from a commercial and employment perspective.

IMAGE | Special Counsel Erin Brown and Associate Director Suzie Leask from Australian Business Lawyers and Advisors’ Newcastle team.