COVID-19 Insolvency Update: Safe Harbour - Weathering the Storm

Nahum Ayliffe, Rory Maguire, Ellena Kouris

Following the recently announced extension of the JobKeeper programme and the Federal Government’s Budget Update, we revisit the relief measures available to corporations experiencing financial distress during the COVID-19 pandemic, which are currently scheduled to end in September.

Temporary measures scheduled to end on 24 September 2020

On 25 March 2020 the Coronavirus Economic Response Package Omnibus Act (2020) was enacted, providing temporary relief for financially distressed businesses. Subject to further regulation, the following measures are due to expire on 24 September 2020:

  • Changes to increase the threshold at which creditors can issue a statutory demand to a company from $2,000 to $20,000, and an increase in the statutory period for a response from 21 days to six months from the date of service;
  • Changes to the personal insolvency system to increase the minimum debt threshold for a creditor to initiate bankruptcy proceedings against a debtor from $5,000 to $20,000, and to increase the statutory period within which a debtor may respond to a bankruptcy notice from 21 days to six months from the date of service;
  • Where a debtor declares an intention to enter voluntary bankruptcy by making a declaration of intention to lodge a debtor’s petition pursuant to section 54A of the Bankruptcy Act, an increase in the period of protection a debtor has against further enforcement measures from unsecured creditors from 21 days to six months; and
  • Relief for company directors from personal liability otherwise associated with their company trading whilst insolvent pursuant to section 588G of the Corporations Act 2001 (Cth) (CA), provided the company incurs the debts in the “ordinary course of business”. Cases where the company is trading whilst insolvent due to dishonest and fraudulent conduct by company directors are still, of course, subject to civil and criminal penalties.

(collectively, the Temporary Measures).

The Federal Government has released the following updates relevant to the COVID-19 pandemic:

  • On 21 July 2020, an extension to the JobKeeper Payment, which will now be retained beyond the scheduled end date of 27 September 2020, remaining in a staged form between 28 September 2020 and 28 March 2021; and
  • On 23 July 2020, an Economic and Fiscal Update was provided on the state of the Australian economy and the impact of the COVID-19 pandemic.

Safe Harbour

Unless an extension is announced, creditors and those experiencing financial distress should note that as at the date of publication, the Temporary Measures are scheduled to end on 24 September 2020.  Once the Temporary Measures end, directors may once again be held personally liable for debts incurred by the company in circumstances where the director has failed to prevent the company from trading whilst insolvent as defined by section 588G(2) of the CA (Insolvent Trading).

However, directors may still avoid personal liability for Insolvent Trading pursuant to the safe harbour provisions in section 588GA of the CA.  The provisions require a director, who starts to suspect that the company may become or be insolvent, to begin developing one or more courses of action that are reasonably likely to lead to a better outcome for the company.  The adequacy of the steps taken by the director is assessed on several criteria, including whether the director has obtained advice from an appropriately qualified advisor.

Subject to the director satisfying the statutory requirements, the exemption applies to debts incurred directly or indirectly in connection with the course of action that is reasonably likely to lead to a better outcome for the company, and would end at the earliest of:

  1. the director failing to take steps to put the proposed course of action into effect within a reasonable time; or
  2. the director ceasing to take any such course of action; or
  3. when the course of action ceases to be reasonably likely to lead to a better outcome for the company; or
  4. the appointment of an administrator or liquidator to the company.

A "better outcome" - what does this mean?

A “better outcome” is defined as “an outcome that is better for the company than the immediate appointment of an administrator, or liquidation, of the company”.  Factors relevant to determining the adequacy or otherwise of the course of action include whether the director is:

  1. properly informing themselves of the company’s financial position;
  2. taking appropriate steps to prevent misconduct by officers or employees of the company, which could adversely affect the company’s ability to pay its debts;
  3. taking steps to ensure that the company is keeping appropriate financial records;
  4. obtaining advice from an appropriately qualified entity, who has sufficient information to give appropriate advice; and/or
  5. developing or implementing a plan for restructuring the company to improve its financial position.

It's important to remember that the safe harbour provisions do not excuse a director from statutory duties, including the requirement to ensure that the company meets its employee entitlements by the relevant due date, and is meeting statutory obligations, including the obligation to report to the Australian Taxation Office.

How we can help

Russell Kennedy will be monitoring any developments, including in relation to the Temporary Measures and will provide further updates.  Russell Kennedy has also published other insights on legislative and regulatory changes during COVID-19, including relevant to the Mandatory Code of Conduct for Commercial Leases and information for creditors on voidable transactions. To visit our COVID-19 Alert hub, click here.

If you require further information, please contact Rohan Harris (Sydney), Nahum Ayliffe (Melbourne), Walter MacCallum (Sydney), Rory Maguire (Melbourne), Joe Denina (Sydney), or a member of our Corporate and Commercial team.

If you would like to stay up to date with Alerts, news and Insights from our team, you can subscribe to our mailing list here.

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