The current state of play
The Coronavirus Economic Response Omnibus Act 2020 (Cth) received royal assent on 24 March 2020. Included in its provisions were several amendments to the Corporations Act 2001 (Cth) which were intended to stave off corporate and economic calamity. These amendments included:
- insertion of a temporary protection from insolvent trading in the form of s 588GAAA which applies for six months from 25 March 2020 - (this six month period was recently extended to 31 December 2020); and
- an amendment to the minimum period for compliance with a statutory demand issued after the commencement of the amendments from the usual 21 days from the date of service to six months from the date of service.
These amendments formed part of a suite of other measures implemented by the Commonwealth including extending the minimum time for compliance with bankruptcy notices and introduction of the JobKeeper and JobSeeker payments.
Between now and 31 December 2020
For all the talk of unprecedented times, fundamental aspects of the Corporations Act and the general law have remained unchanged:
- directors have continued to owe duties to exercise their powers with reasonable care and diligence, in good faith, in the bests of their company for a proper purpose and not to improperly use their position to gain an advantage for themselves or someone else or to cause detriment to the company;
- the voidable transaction provisions, including unfair preference claims, continue to apply;
- personal liability for employee entitlements, including unpaid superannuation, and certain other tax liabilities remain in force.
Beyond the relatively limited protections afforded by s 588GAAA, directors remain liable for and exposed to claims arising from their conduct or inaction. Accordingly, directors should continue to identify and address the issues, including what to do once the current protections expire. These will include:
- maintain a careful and ever watchful eye on their company’s financial position in the short and medium term;
- assessing the viability of their company or its business or businesses in the same period including identifying/implementing appropriate options for restructure and/or implement a restructure;
- ensuring the company is complying with its statutory obligations including to lodge returns and as to employee entitlements;
- rectifying any breaches of statutory obligations including by way of entering into payment arrangements with the ATO;
Directors who hold concerns about the solvency or likely solvency of their company may need to give serious consideration to engaging the safe harbour provisions under s 588GA or the options available through external administration.
The safe harbour provisions under s 588GA remain available notwithstanding s 588GAAA and are not subject to a limitation period and are capable of being engaged at any time subject to satisfaction of the statutory preconditions and requirements. Engaging s 588GA during the term of the moratorium under s 588GAAA may well offer companies and their directors greater protections and more flexibility if they are require to negotiate with creditors or are required to quickly move into external administration.
A “wait and see” approach is not the right approach
The desire to adopt a “wait and see” approach is as tempting as it is dangerous. The obligations and duties owed by directors are positive in nature. They cannot avoid liability for breach of duties by adopting a passive or abstentionist approach to them. Moreover, as the High Court’s decision in Australian Securities and Investments Commission v King [2020] HCA 4, those obligations have wider application then may appear a first blush. Delivered in March 2020, King makes plain the broad definition of “officer” in s 9 of the Corporations Act has the potential to impose duties and thereby liability for their breach on non-office holders but whom otherwise meet the definition in s 9.
Moreover, given the continued operation of the voidable transaction provisions, including for unfair preferences, directors will need to be mindful of the potential for liquidators to demand payment of amounts already received from debtors.
Safe harbour
The temporary protection from insolvent trading under s 588GAAA, which the Corporations Act refers to as a “safe harbour” is to be compared with the safe harbour established under s 588GA which came into force in September 2017. Both operate as defences against insolvent trading claims against directors under s 588G of the Act and offer the same protections so long as they operate.
However, the safe harbour under s 588GAAA, perhaps more accurately described as a “moratorium”, is passive in that it applies to any debt incurred in the ordinary course of the company’s business during the operative term of the section. The availability of the defence is dependent on the quality of the debt incurred and the date on which it was incurred.
In contrast, s 588GA imposes preconditions and positive obligations on the part of directors in order for the protections under that section to be engaged. These include ensuring the company is compliant with certain statutory obligations and the directors having started developing one or more courses of action that are reasonably likely to lead to a better oucome for the company.
The safe harbour under s 588GA requires the directors to bring the company and keep the company within the safe harbour established under s 588GA to maintain the protection from insolvent trading. The protections to continue to run during whilst the company continues to satisfy the requirements of the s 588GA.
