In the wake of the COVID-19 pandemic how we do business is changing radically.
The coming weeks and months will bring payment pressures to the surface for many companies as they are not able to comply with their financial obligations. We have been actively advising clients to keep the channels of communication open throughout the supply chain as this shall pass. In the meantime, we need to collectively help each other’s businesses get through the current challenges to ensure the economy can eventually recover.
Directors Duties
Now, more than ever, given the precarious financial impact of Covid-19 on businesses and the economy, it is essential that directors ensure they keep themselves informed of the financial health of their organisations and that they take active steps to discharge their duties in terms of solvency and risk mitigation.
The Federal Government has recently announced sweeping temporary changes to insolvency laws in the wake of the financial distress COVID-19 is having on Australian businesses to provide some relief. If you’re a director, here’s what you need to know:
Insolvent Trading Relief
One of your duties as a director pursuant to the Corporations Act 2001 (Cth) is to prevent insolvent trading and ensure that the company you are overseeing does not incur debts that you have reasonable grounds to suspect will not be able to be paid.
To ensure companies have confidence to trade through this health crisis and return to trading viability after the pandemic, temporary changes were announced by the Federal Government on 22 March 2020, relieving directors of their duty to prevent insolvent trading with respect to any debts incurred in the ordinary course of the company’s business for a period of 6 months.
Rather than putting your company into administration or liquidation as a result of cashflow difficulties, directors can now continue to trade without fear of personal liability for six (6) months in respect to debts incurred in the ordinary course of business.
Safe Harbour Extended for Directors
Directors often come to us concerned about their potential exposure to personal liability for insolvent trading. Although temporary relief is available, it is for a short period of time.
In 2017 the concept of ‘Safe Harbour’ provisions were introduced to the Corporations Act 201 (Cth) to protect directors from being penalised for insolvent trading while they attempt to restructure and stabilise a struggling business. Now, more than ever, directors need to be aware of the actions they can take to seek protection from insolvency consequences.
According to section 588GA(1) of the Corporations Act 2001, if you’re a Director and you:
- suspect the company is, or may become insolvent; and
- you develop one or more courses of action that are reasonably likely to lead to a better outcome for the company; and
- the debt is incurred directly or indirectly in connection with developing and taking the course of action
then you may be protected from personal liability for the company’s debts while trading insolvent.
This regime aims to protect directors that take early and appropriate action as soon as a they suspect the company is approaching a state of financial distress. To rely on Safe Harbour provisions, the kinds of action you need to take includes:
- being properly informed of the company’s financial position at all times;
- taking propriate steps to prevent any misconduct by officers or employees;
- taking appropriate steps to ensure that the company is keeping appropriate financial records;
- obtaining advice from an appropriately qualified entity who was given sufficient information to give appropriate advice; and
- developing or implementing a plan for restructuring the company to improve its financial position.
Remember, you must be active in discharging your duties as a director. Early and decisive action is required. Actively ensuring that you are kept up to date with the financial standing of your company, as well as taking steps to secure a better outcome for the company, are integral in being able to qualify for this protection.
If you need assistance or advice on how to navigate these tumultuous and uncertain times, call us or Zoom in for a video conference – we’re here to help.
Stay safe and keep well.