Victoria is starting to see a timeline for the gradual lifting of the Stage 4 restrictions limiting the movement of the public from homes and prohibiting public gatherings. However, there are many industries which will be affected by restrictions for some time to come.

In these circumstances, what options are available to business owners who are significantly limited in their ability to trade, or cannot trade at all?

Safe Harbour Amendments

Directors of a company have a positive duty to prevent their company from trading insolvent or incurring a debt which would result in it becoming insolvent[1]. There is a civil penalty for insolvent trading and, if by failing to prevent debts from being incurred the director has acted dishonestly, it may also be a criminal offence.

It is critical for directors to be aware that upon liquidation they can be made personally liable for all debts they incur in breach of their duty to prevent insolvent trading.

In 2017 a “safe harbour” defence was added to the Corporations Act 2001 (Cth). This is a specific defence which protects directors from a claim of breach of duty to prevent insolvent trading where the director suspects insolvent trading and proceeds to develop one or more strategies which are reasonably likely to lead to a better outcome for creditors (i.e. better than administration or liquidation) and incurs debts in the implementation of those strategies.

To rely on this defence a director must meet the above test – reasonably likely to lead to better outcome for creditors – and must also:

  • meet all employee entitlements as they fall due; and
  • ensure all statutory lodgements (e.g. payroll tax, superannuation, etc.) are up to date.

COVID-19 Response

On 24 March 2020 the Coronavirus Economic Response Package Omnibus Act 2020 (“Omnibus Act”) came into law. This Omnibus Act contains emergency response amendments to the Corporations Act 2001 (Cth) to ease some of the immediate impact of the current crisis on our economy and aims to keep businesses open as long as possible.

These amendments include:

  • relaxing the insolvent trading rules under the COVID-19 crisis (where debts are incurred in the ordinary course of business in the 6-month period commencing on 24 March 2020);
  • increasing the threshold debt levels for initiating bankruptcy and liquidation proceedings to $20,000.00; and
  • extending the time companies have for responding to bankruptcy and liquidation demands to 6 months (for demands served after 25 March 2020).

Next Steps for Directors

The intention of the above is to keep businesses in a state of suspension or hibernation while this crisis is in effect. However, the amendments introduced by the Omnibus Act do not suspend directors’ fundamental duties under sections 180-184 of the Corporations Act 2001 (Cth) to act carefully and diligently, in good faith and for a proper purpose.

Further, the duty to have regard to the interest of creditors when approaching insolvency has not been removed or suspended – so directors must consider the position the company will face at the end of the suspension period and plan accordingly now.

Start planning now

The relief measures put in place under the Omnibus Act are due to expire on 25 September 2020. As of 6 September 2020, the Federal Government has announced that the relief measures are to be extended to 31 December 2020.

For more information, see for example:

NextGen Legal is experienced in the areas of business protection planning, risk management and insolvency. We would be happy to assist with steps you may wish to implement or options available to you in the light of the current landscape. Please contact our office on 03 9039 2142 to book an appointment.

[1] Section 588G of the Corporations Act 2001 (Cth).