Directors’ duties: Corona Virus safe harbour

As a part of the government’s coronavirus economic response package, a provision was inserted into the Corporations Act 2001 to provide temporary relief (safe harbour) for directors of financially distressed business from potential personal liability for insolvent trading. This was designed to counter the pressure on boards and directors to make quick decisions to enter into an insolvency process to mitigate the risks of insolvent trading during this economic downturn.

If you’re seeking to rely on this particular safe harbour measure to protect yourself, any debt must be incurred:

in the ordinary course of the company’s business (i.e. it is necessary to facilitate the continuation of the business);
during the 6-month period commencing from 25 March 2020 (or a longer period as prescribed by the regulations); and
before any appointment of an administrator or liquidator during the temporary safe harbour application period.

For holding companies, depending on whether certain conditions have been met, temporary relief may also extend to debts incurred by a subsidiary. Importantly, this temporary safe harbour measure does not replace the existing safe harbour provisions in the Corporations Act, and directors can still use those if they so wish.

If you do choose to use the temporary relief regarding insolvency, remember you will bear the evidential burden to prove that the safe harbour requirements have been met. It should also be noted that even though relief is provided from insolvent trading, this does not extend to relief from statutory and common law directors’ duties.

These duties include acting in the best interests of the company as a whole (i.e. interests of shareholders, creditors and employees), duty to act with care, diligence and good faith, and not to use a directors’ position or information obtained as a director to gain an advantage or cause detriment to the company.

Even if you’re not a named director/officer of a company, these statutory and common law directors’ duties may still apply to you if you have the capacity to significantly affect the financial standing of the company. While ASIC has recalibrated its regulatory priorities to focus on challenges posed by COVID-19 by suspending a number of near-term activities which are not time-critical, it will maintain enforcement activities and continue to investigate and take action where public interest warrants.

According to ASIC, whether or not action is taken depends on the assessment of all relevant circumstances, including what a director or officer could reasonably have foreseen at the time of making relevant decisions or incurring debts. Therefore, if you plan on using these safe harbour provisions to get your business through the next 6 months, it may be prudent to seek the advice of an appropriately qualified adviser.