Safe Harbour Protection Against Insolvent Trading and Relief Against Director Duties

Disputes and Insolvency

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DATE PUBLISHED: April 30, 2020

The Commissioner of the Australian Securities & Investments Commission (ASIC), John Price, recently released an article on the temporary COVID-19 safe harbour protections against insolvent trading.

Commissioner Price also referenced the recent High Court decision of Australian Securities and Investments Commission v King [2020] HCA 4 (King’s Decision), stressing that the fundamental duties under the Corporations Act 2001 (Cth) (Corporations Act) are not only owed by directors, but also extend to company officers who have the capacity to significantly affect the financial standing of the company.

In the current economic climate that we unfortunately find ourselves in, where financial hardship may incentivise directors and officers to test the limits of their corporate responsibility, it is important that directors and officers are aware of the government relief that is available as well as temporary extensions to statutory timeframes and obligations, whilst remaining cognisant of the fact that they continue to owe duties to the company.

This article provides an overview of the temporary safe harbour provisions for insolvent trading and provides a reminder as to the duties that directors and officers continue to owe despite the ongoing coronavirus saga.


SAFE HARBOUR FOR INSOLVENT TRADING

In response to the COVI9-19 pandemic, the Federal Government introduced amendments to Corporations Act which provide temporary relief for directors in relation to personal liability for insolvent trading under section 588G of the Corporations Act (COVID Safe Harbour). The COVID Safe Harbour provision commenced on 25 March 2020 and applies for a period of 6 months.

Under the COVID Safe Harbour, the duty to prevent insolvent trading, and the associated personal liability for directors, will now not apply to debts incurred in the “ordinary course of the company’s business.”

The legislation provides no guidance on what constitutes debts that are incurred in the ordinary course and what falls outside of the safe harbour. However, the explanatory memorandum to legislation provides that a director is taken to incur a debt in the ordinary course of business if it is necessary to facilitate the continuation of the business and could include, for example, loans to fund a move of business operations online or to ensure the continued payment of employees (including their salaries and benefits).

Given the purpose of the legislation is to assist businesses in a time of extreme uncertainty, a relatively wide application is expected to be applied.

Unlike other safe harbour protections in the Corporations Act, this exemption from insolvent trading is not conditional on compliance with tax lodgement obligations or the payment of employee entitlements.


DIRECTOR DUTIES

The COVID Safe Harbour will only provide relief to directors in respect of their duties to prevent insolvent trading. Directors also have a number of other duties under the Corporations Act which will continue to apply despite the coronavirus pandemic.

Sections 180 to 183 of the Corporations Act specify the four fundamental duties that are owed by directors:

  1. (care and diligence) - this requires directors to act honestly and with the degree of care and diligence that a reasonable person might be expected to show in the role.
  2. (good faith) - this requires directors to act in good faith in the best interests of the company and for a proper purpose, including to avoid conflicts of interest, and to reveal and manage conflicts if they arise.
  3. (not to improperly use position) - this requires directors to not improperly use their position to gain an advantage for themselves or someone else, whether or not to the detriment to the company.
  4. (not to improperly use information) - this requires directors to not improperly use the information they gain in the course of their duties to gain an advantage for themselves or someone else, whether or not to the detriment to the company.

However, what is not commonly known is that these fundamental duties are owed by directors as well as ‘officers’ of companies. An officer is defined in section 9 of the Corporations Act to include persons who (among other things):

  1. make, or participate in making decisions that affect the business of the company; and
  2. have the financial capacity to significantly affect the company’s financial standing.


KING’S DECISION

The King Decision considered the questions of whether a group CEO, who was not formally appointed as an officeholder in a subsidiary company, but who was nevertheless ‘overall responsible’ for the subsidiary, fell within the definition of officer for that subsidiary.

The full court of the High Court held that the group CEO was an officer for the purposes of the Corporations Act and therefore required to comply with the same fundamental duties as directors. The Court made this finding on the basis that the CEO had ‘overall responsibility’ and had the capacity ‘to significantly affect the financial standing’ of the subsidiary.

In the leading judgement, the High Court stressed that “it would be an extraordinary state of affairs if those who determine the course of a company's financial affairs could avoid responsibility for their conduct by simply avoiding any formal designation of their responsibilities.”


SUMMARY 

The COVID Safe Harbour will assist directors of companies by providing relief against the duty to prevent insolvent trading on the condition that debts are incurred in the ordinary course of business.

However, as stressed by Commissioner Price, it is important that directors don’t rely on the temporary safe harbour protections as a means to circumvent the duties that they otherwise continue to owe to the company and its shareholders.

Furthermore, it is important that individuals that do not hold a formal appointment but that still exercise a degree of control and influence over the company take steps to comply with the fundamental duties of directors. The King Decision sends a clear signal to anyone running a company – in name or in effect – that they should be responsible and held accountable for their actions.

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