Covid-19 Safe Harbour Protection for Directors

Director’s Duty to Prevent Insolvent Trading

Directors are generally personally liable for debts a company has incurred whilst:

1. they are a director of a company at the time when the company incurs a debt; and
2. the company is insolvent at that time, or becomes insolvent by incurring that debt; and
3.  when the company incurs the debt, there are reasonable grounds for suspecting that the company  is insolvent or would become insolvent by incurring that debt; and
4. the person is aware that at the time of incurring the debt, there are reasonable grounds for suspecting the company is insolvent (or would become insolvent) or a reasonable person would be so aware (588G(2)).

Covid-19 Safe Harbour Protection for Directors

In March 2020, the Federal Government passed legislation to assist companies and Directors through the pandemic.  The effect was to place a temporary six (6) month freeze (ie to 25 September 2020) from personal liability for insolvent trading.

On 7 September 2020, the Federal Government extended the "freeze" period to 31 December 2020.

As a result, Part 3 of Schedule 12 of the Omnibus Act 2020 inserted section 588GAAA into the Corporations Act to create a temporary safe harbour in response to the COVID-19 pandemic.

The section essentially carves out insolvent trading liability for debts incurred:

1. in the ordinary course of business;
2. during the 6-month period (or longer); and
3. before any appointment during that period of an external administrator

What Does this Mean for Directors?

Consideration must be taken of debts incurred prior to March 2020 which are and will remain unpaid at the end of the “freeze” period.

There is some concern amongst insolvency professionals that the temporary relief to a personal liability for insolvent trading may only be limited to directors who appoint an Administrator or Liquidator before the end of the period. That is the appointment must occur (at least at this stage) on or before  31 December 2020.

In matters where a company has traded through the last six months, and in the considered opinion of the director (having taken advice) the company will be unable to meet its debts in the future, the directors should act.

Accordingly, a conservative approach is maybe to be cautious and consider appointing an external administrator, before 31 December 2020 to avoid future personal liability.

Rommel Alfonso makes Partner and is Registered as a Liquidator

We are pleased to announce that Rommel Alfonso has been admitted as a partner of Smith Hancock as at 1 July 2020. ASIC has recently registered him as a liquidator. Rommel commenced his insolvency career as a graduate at Smith Hancock. During his time at Smith Hancock he has taken on senior roles in a wide range of matters across many industries. Rommel is well positioned to use that knowledge and experience as we head towards challenging times recovering from the effects of Covid-19.

Confirming what we already knew about Rommel’s technical knowledge, he recently did us proud by achieving the highest mark in NSW and ACT for the ARITA Advanced Certification (Insolvency Subject) module.