In the wake of COVID-19 and the increased uncertainty in carrying on business worldwide, the Australian Government has passed temporary safe harbour measures in order to offer flexibility to companies working through financial distress. In conjunction with the existing safe harbour provisions, the temporary changes provide an added measure of comfort to directors navigating a company’s position throughout uncharted territory.
Safe Harbour – The Known
Usually, in accordance with section 588G(2) of the Corporations Act 2001 (Cth) (the Corporations Act) a director will be personally liable for certain debts which are incurred if:
- They are a director at the time when the company incurs the debt;
- The company is insolvent at that time, or becomes insolvent by incurring that debt; and
- At that time, there are reasonable grounds for suspecting that the company is insolvent or would become insolvent.
From 19 September 2017, however, directors of Australian companies have had the benefit of the ‘safe harbour provisions’ which provides directors an exception from liability under the insolvent trading provisions, provided certain criteria are met (the 2017 Safe Harbour Provisions).
Specifically, in accordance with section 588GA(1) of the Corporations Act, the 2017 Safe Harbour Provisions apply where:
- at a particular time after the director starts to suspect the company may become or be insolvent;
- the director starts developing one or more courses of action;
- the course(s) of action is / are reasonably likely to lead to a better outcome for the company; and
- the debt is incurred directly or indirectly in connection with any such course of action during the safe harbour period.
Directors who wish to raise the 2017 Safe Harbour Provisions bear the evidential burden to establish the matters set out in section 588GA(1). The 2017 Safe Harbour Provisions provide protection beyond six months.
COVID-19 Safe Harbour Extension – The Unknown
On 25 March 2020, the Coronavirus Economic Response Package Ominbus Act 2020 (Cth) (the COVID-19 Act) created an extension to the 2017 Safe Harbour Provisions in response to the COVID-19 global crisis.
The COVID-19 Act inserts a new section 588GAAA into the Corporations Act which states that a director will not be liable for insolvent trading in respect of a debt incurred:
- in the ordinary course of the company’s business; and
- during the six-month period starting on the day the section commences (or any longer period prescribed by the regulations).
The six-month period commenced on 25 March 2020, such that new section 588GAAA applies to debts incurred by the company from 25 March 2020 to 25 September 2020.
‘In the ordinary course of business’ is a particularly flexible phrase and what debts will be regarded as being incurred in the ordinary course is likely to cause disagreement in proceedings if brought by a liquidator. Paragraph 12.18 of the Explanatory Memorandum of the COVID-19 Act, however states that a director is taken to incur a debt in the ordinary course of business if it is necessary to facilitate the continuation of the business during the six-month period beginning 25 March 2020. This could include, for example:
- a director taking out a loan;
- to move some business operations online; and
- debts incurred through continuing to pay employees during the Coronavirus pandemic.
This appears to suggest that the safe harbour extension provisions are intended to apply to debts incurred as part of the ordinary day-to-day trading operations of the business, as well as to certain debts incurred to restructure the business to assist with continued trading through the pandemic.
The evidential burden to prove that a debt was incurred in the ‘ordinary course of the company’s business’ will continue to fall upon the directors (s 588GAAA(2)).
Beyond the Uncharted Territory
The economic impact of COVID-19 means that many businesses will likely face economic difficulties beyond the six-month period provided for by the COVID-19 Safe Harbour extension.
It is essential to determine the various problems the company may face and what safe harbour protections may be relied upon. Identifying these issues at an early stage may assist in determining whether a company may employ the COVID-19 Safe Harbour extension, in addition to the 2017 Safe Harbour Provisions and secured the ongoing viability of the company.
General directors’ duties will still however apply such that directors do not necessarily have a risk free COVID-19 reprieve by virtue of the new provision outlined above. Accordingly, directors must be vigilant in actively identifying and dealing with the financial issues that confront their company, the impact those issues may have on the company’s creditors and the realistic future of trading prospects of the company.
Any survival or restructure plans should be carefully considered, documented and implemented to ensure stability for the company moving forward. Some of the more commonly employed methods include refinancing, capital raising, standstills arrangements with creditors, cost reductions, business restructures, repurposing equipment to name just a few. Monitoring and reassessment of any survival or restructure plan is also critical as the social distancing and other government restrictions in Australia change.
If any survival or restructure plans become impractical or ineffectual, external administration options should be considered and engaged.
As a result, most businesses will still need to work quickly to prepare a detailed survival and turnaround plan that will encompass some or all of the well-established restructure plans.
Polczynski Robinson is well placed to assist creditors, companies or directors in considering, documenting and implementing plans which meet the requirements of amongst other matters, the existing 2017 Safe Harbour and COVID-19 Safe Harbour provisions.
For more information, please contact Kylie Tate or Marcus Carlei.