Phone: (02) 9689 2266 Email  Email Us  Subscribe to Newsletter Search Site:   Search

Covid-19 Safe Harbour Protection for Directors

Rommel Alfonso

04 Sep 2020

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.

News & Updates

Director Identification Number Regime Now in Place Read all
Severe Consequences for Shady Pre-Insolvency Advice Read all
ATO - Change in Debt Collection Approach - Directors Beware! Read all
Director Resignation Changes Read all
Small Business Restructuring Reform Read all
Alert to Advisors - Potential Personal Liability Read all
Covid-19 Safe Harbour Protection for Directors Read all
The Dangers of Lending to Loved Ones Read all
Impending Changes to the DPN and PPSR Update Read all
Recent criminal changes to the Director Penalty Notice Regime Read all
Gaol Time for Delinquent Company Directors / PPSR Update Read all
When is a Guarantee Not a Guarantee? Read all
Illegal Phoenix Operations & Determining Right to Income Read all
New & Proposed Legislative Changes Read all
Voidable Property Transfer & Director Liability Read all
Welcome to New Partner and Reforms to Insolvency Law Read all
ASIC Statistics and Enforcement Read all
Government Targets Foreign Investors with New Tax Legislation Read all
Dodgy Advisers – Watch Out! Read all
Steering the Ship onto Rocks: Directors Flouting Obligations Read all
From the Mining Boom to the Ideas Boom - What it All Means Read all
When is a Debt to the ATO Due and Payable Read all
ATO and Phoenix Activity Read all
Unreasonable Director-related Transactions & PPSA Update Read all
PPS and ASIC Prosecution Read all
Leases and Insolvency Read all
PPS Update Read all
Expansion of Director Liability Provisions (PAYG & SGC) Now Law Read all
Proposed Changes to Corporations Act (Phoenix Activity) and Taxation Act (Director Penalty) Read all
March 2012 PPSA Newsletter Practical Worked Examples Read all
Personal Property Securities Act ("PPSA") Now Law Read all
PPS Reform - Understanding Security Interests: Perfection and Priorities Read all
Tax Changes - Expansion of Director Liability Provisions Read all
Australian Taxation Office - Statutory Garnishee Notices Read all
Major Change to Registering Security Interests – Personal Property Securities Reform Read all
PDF 8 Essential Steps if Your Business is in Distress View
PDF ASIC Information Sheet: Insolvency glossary View
PDF Business for Sale View
PDF Directors Duties in Uncertain Financial Times View
PDF Guidance for Accountants in Public Practice: Helping Clients with Companies in Financial Distress View
PDF Real Estate for Sale - Mascot View
PDF Real Estate for Sale - Vineyard View
PDF Solar Energy Business View

Cover of Excellence
Liability limited by a Scheme approved under Professional Standards Legislation