Temporary safe harbour protections and directors’ duties: considerations for Boards
As part of its COVID-19 economic response package, the Federal Government recently introduced a temporary ‘safe harbour’ for directors from personal liability for a company’s insolvent trading, which will apply for a period of six months from 25 March 2020.
The intent of the relief is to give companies the confidence to continue trading during the COVID-19 pandemic, by reducing liability for directors if the company is not necessarily able to pay its debts when they become due and payable. However, for Boards navigating the impacts of COVID-19, it is important to note that this measure does not absolve directors of their core duties to the company, such as the duty to act with due care and diligence and in the best interests of the company as a whole. Directors must be careful to uphold those duties in their decision-making, including decisions which affect the solvency of the company.
Under s 588G(1) of the Corporations Act 2001 (Cth) (Corporations Act), a director has a duty to prevent a company from incurring a debt:
A breach of the duty provided for in s 588G(1) can attract criminal and civil penalties and the director can be required to pay compensation to the company. For that reason, directors may understandably move quickly to enter some form of external administration where there is a risk that the company is trading while insolvent.
The temporary relief is established by the Coronavirus Economic Response Package Omnibus Act 2020 (Cth) (COVID-19 Act), which amends the Corporations Act to include new section 588GAAA. Pursuant to this section, s 588G will not apply to a person and a debt incurred:
Paragraph 12.18 of the Explanatory Memorandum for the COVID-19 Act states that a company 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 … of the [temporary legislation]”.
This could include debts incurred by continuing to pay employees during the COVID-19 pandemic or new loans for working capital purposes.
It is noted that a director who wishes to rely on s 588GAAA bears the evidential burden in establishing the requirements of s 588G i.e. that the debt was incurred in the ordinary course of the company’s business during the relevant period.
Section 588GAAA does not extend to a failure to prevent insolvent trading which is dishonest, which is a criminal offence under the Corporations Act.
In addition to the temporary relief from s 588G, directors may be able to rely on existing ‘safe harbour’ from s 588G introduced in 2017.
Under s 588GA of the Corporations Act, a director will not be liable under s 588G if, after the director suspects the company may become or is insolvent, the director starts developing one or more courses of action that are reasonably likely to lead to a better outcome for the company. Our original article on the safe harbour provisions can be found here and recent consideration of their applicability amidst COVID-19 can be found here.
This existing safe harbour may have greater application after the expiry of the temporary relief (if it is not extended beyond six months) as the long-term impacts of the pandemic come into focus.
Notwithstanding the temporary ‘safe harbour’ from liability where a company is trading insolvent, the duties which directors owe to the company under the Corporations Act (and the equivalent duties at common law) continue to apply.
A director can still be liable for breach of one or more of these core duties even where they are able to rely on the temporary safe harbour from a breach of s 588G. A breach of duty can attract a civil penalty of up to $200,000 under the Corporations Act or where the company has suffered loss, a court may make a compensation order.
The duties of a director include (amongst other duties) a duty to:
Whether a director has complied with their duty to act with care and diligence is determined by reference to the “business judgement rule” under s 180(2) of the Corporations Act. A director who makes a business judgement complies with the duty if they:
It will be important for directors to keep these duties “front of mind” as they confront the unprecedented challenges of the COVID-19 pandemic and measure their decisions against the business judgement rule.
ASIC’s recent article Directors duties in the context of COVID-19 reinforces the need for reflection on directors’ duties at this time. ASIC notes the following:
If you would like further advice on the matters discussed in this article, please contact our Corporate and Mergers & Acquisitions team.