INSOLVENCY PROTECTIONS FOR DIRECTORS

Commercial Directions

A director of a company can be personally liable for debts incurred by the company if (at the time the debts were incurred) there were ‘reasonable grounds’ for the director to suspect that the company was either insolvent or would become insolvent by incurring the debt (s 588G of the Corporations Act 2001 (Cth) (Corps Act)).

The Corps Act introduced certain ‘safe harbour’ protections for directors in 2017. Further COVID-19 safe harbour provisions were passed by parliament (on
23 March 2020) to provide some additional protection to directors.

Directors will be able to obtain relief from personal liability for a company’s debts under the new provisions if the debt:

  • is incurred in the ‘ordinary course of the company’s business’
  • is incurred during the six months from the day the new law commenced, or any longer period prescribed by the regulations, and
  • was incurred before an administrator or liquidator is appointed.

Additional amendments to the Corps Act extend the period for companies to respond to statutory demands (from 21 days to six months) and also increase the minimum debt which can form the basis for a statutory demand (from $2,000 to $20,000).

What qualifies as a debt incurred in the ‘ordinary course of business’ is not prescribed by the amending legislation.

The Explanatory Memorandum 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 that begins on commencement of the subparagraph. This could include, for example, a director taking out a loan to move some business operations online. It could also include debts incurred through continuing to pay employees during the Coronavirus pandemic.’

The amendments to the Corps Act should not be viewed as carte blanche for directors to incur unnecessary debts or to provide protections to directors once it becomes clear that the company will not be able to recover from the impacts of the COVID-19 pandemic once normal business operations recommence.

Directors should also remain aware that the safe harbour provisions will not prevent the application of other director duties to act in the best interests of all members of a company, or prevent any third party holding personal guarantees from a director to be able to claim under those guarantees, in the event of a failure of the company to pay its debts.

For further information and assistance on the issues raised in this article please speak to the authors, Tina van Epen – Partner, Emily Gagliardi – Lawyer, or your usual Moray & Agnew contact.

The above content is commentary rather than legal advice and was prepared on the basis of applicable legislation, government programs and initiatives that were in place as of the date of publication. Given the ongoing evolution of both the COVID-19 pandemic and frequent consequential changes to the various laws and programs within all Australian states and territories, readers should seek legal advice on the current situation as applicable to their specific circumstances before taking any action in relation to the above.

 


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