Clarifications on Safe Harbour

Clarifications on Safe Harbour
Posted on 4 Nov 2020

In September, the Federal Govt announced the extension of the temporary relief measures ushered in by the Coronavirus Economic Response Package Omnibus Act 2020 (CERPO)which included the temporary relief for directors from personal liability for trading whilst insolvent.

However, there are limitations on the application of the new protections, and therefore the ability of directors to avail themselves of the relief from insolvent trading claims.

 

What relief is available to directors via ‘Safe Harbour’?

The concept of ‘safe harbour’ is still relatively new as the insolvent trading provisions became subject to reforms within the past five years.

The Insolvency Law Reform Act 2016 amended both the Bankruptcy Act1966 and the Corporations Act 2001 by introducing a new schedule of common rules that practitioners, lawyers and insolvency practitioners (IPs) and accountants are now fairly settled with.

A major feature of those reforms was the new safe harbour provisions which came into effect from September 2017, and the ipso facto reforms which came into effect from July 2018. It is the first of those that we are concerned with now.

A new s558GA was inserted in Part 5.7B of the Corporations Act immediately following the insolvent trading provisions of the Act affording protection to proactive directors. In summary:

 

  • The safe harbour protections apply if after the director starts to suspect the company is, or may become insolvent, s/he develops  “one or more courses of action that are reasonably likely to lead to a better outcome for the company”

however,

  • Criteria to be met to be afforded the protection includes (in brief)
    • Payment of employee entitlements (such as superannuation); and
    • Necessary reporting to the ATO of liabilities, lodgements or returns etc.

As a consequence of these reforms, a new era commenced whereby directors, proactively taking steps to seek specialist legal and accounting advice, were able to increase their prospects of availing themselves of a further level of protection from insolvent trading claims by liquidators.

With the onset of the pandemic, there was recognition of further temporary relief, particularly for small business, being needed to combat the additional financial pressures created by Covid-19. Acting swiftly, the federal government announced its Coronavirus Economic Response Packageand CERPO was enacted in March 2020.

 

Changes introduced by CERPO

There were a number of amendments introduced by CERPO to existing insolvency legislation. An expansion of the safe harbour provisions is one of them.

This relief for directors was effected by the introduction of a new section 588GAAA which provides that the provision in the pre-existing s588G(2) – being the contravention of the duty of the director when s/he fails to prevent the company incurring a debt when s/he ought to have been aware of the insolvency of the company – does not apply if the debt is incurred :

  • in the ordinary course of the company’s business;
  • during the 6 month period starting on the day of commencement of the new CERPO provision (or any longer period prescribed by regulations);
  • before any appointment during that period of an administrator, or liquidator of the company.

 

Since the extension of the relief to 31 December 2020 was announced in September, there has been industry commentary suggesting an ambiguity in the interpretation of the s588GAAA. On one reading, it may be that the relief is only available in circumstances where the director/s appoint an administrator or a liquidator prior to the expiry of the period, ie 31 December 2020. Otherwise directors may not be able to rely on the protection from insolvent trading claims should the company subsequently go into liquidation.

The other notable difference in the new provision is that it makes no mention of development of “one or more courses of action that are reasonably likely to lead to a better outcome for the company”. This was a major feature of the earlier reforms but given its absence in s588GAAA, directors need be aware that taking those steps that are contemplated by s588GA is likely not sufficient.

 

Limitations on the new section

It certainly appears that there are limitations on the application of this new (albeit temporary) protection.

Developing a course of action is simply not mentioned in the new s588GAAA. Accordingly, taking advice from a specialist in the industry to develop a plan to seek to lead to a better outcome for the company, is not going to ensure protection.

Further, given the wording of section 588GAAA (1) (c), if no step is taken by the director/s prior to expiry of the period, and therefore 31 December 2020, the protection may be lost entirely.

As with any new legislation, there is a period of uncertainty as to how any ambiguity will be addressed by the Courts, until such time as a matter comes forward for judicial determination.

Industry commentary suggests that the risk is too great not to take those steps to appoint prior to 31 December 2020 and at CML we agree. We encourage directors of any company that may have been insolvent in the period up to 31 December to seek expert advice regarding the potential need to put the company into administration or liquidation on or before 31 December to preserve that protection. 

For expert advice in this area contact a member of the team today

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