Directors Duties in The Context Of COVID-19

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Monday, April 20, 2020   / 07:57AM / By ASIC Commissioner John Price*  / Header Image Credit: AICD and ASIC

 

 

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The current evolving circumstances surrounding COVID-19 present many challenges to companies, boards, management and their stakeholders.

 

In a short space of time, companies will be required to focus on and, most likely, recalibrate aspects of their corporate strategy, risk-management framework, and funding and capital management strategy - among other things.

 

Given the possible impact of decisions taken during this time on the long-term sustainability of the companies, directors and officers will need to carefully reflect on their fundamental duties to act with due care, skill and diligence and to act in the best interests of the company.

 

This will include reflection on which stakeholders' interests need to be factored into decisions - including employees, investors and creditors. This continues to be the case in areas where temporary relief has been provided from specific obligations under the law as illustrated below.

 

Insolvency and 'COVID-19 safe harbour' provisions

 

On 24 March 2020, the Coronavirus Economic Response Package Omnibus Bill 2020 received Royal Assent. Among other measures, the bill inserted a new section 588GAAA into the Corporations Act 2001 granting temporary relief for financially distressed businesses. From a corporate view, the temporary amendments provide relief for directors from potential personal liability for insolvent trading.

 

Read here:  The Coronavirus Economic Response Package Omnibus Bill 2020.

 

 

The Explanatory Memorandum states that this relief is provided as a 'new safe harbour from the directors' duty to prevent insolvent trading'. To be able to rely on these measures, the debt incurred must be incurred:

  • in the ordinary course of the company's business
  • during the six-month period commencing from 25 March 2020 (or a longer period as prescribed by the regulations)
  • before any appointment of an administrator or liquidator during the temporary safe harbour application period.

 

The Explanatory Memorandum to the Bill explains that a director is taken to have incurred a debt in the ordinary course of business if it is necessary to facilitate the continuation of the business during the six-month period commencing on 25 March 2020.

 

A director wishing to rely on the temporary safe harbour measure 'bears an evidential burden' to prove that the requirements of the temporary safe harbour provisions are met. It may need to be shown that the debt was not effectively incurred before 25 March 2020. If certain conditions are met, the temporary safe harbour relief also extends to a holding company in respect of debts incurred by a subsidiary.

 

These temporary measures do not replace the existing 'safe harbour' provisions in the Corporations Act but add to them.

 

Even though temporary relief is provided from the insolvent trading provisions, that relief does not extend to relief from statutory and common law directors duties. These include the duty to act in the best interests of the company as a whole (which can involve directors taking into account the interests of stakeholders beyond shareholders including creditors when the company is in financial distress). These duties also involve the duty to act with care, diligence and good faith and not to use a director's position or information obtained as a director to gain an advantage or cause detriment to the company.

 

A recent High Court decision has confirmed that these duties extend beyond those named as directors to officers of the company to those who have the capacity to significantly affect the financial standing of the company.

 

The response to the COVID-19 pandemic is constantly evolving.

 

Directors are encouraged to seek advice early from a suitably qualified and independent advisor about the company's financial affairs and the options available to manage the disruption caused by COVID-19. Directors should be wary of approaches by unqualified advisors offering unsolicited assistance in dealing with the challenges COVID-19 presents.

 

 

ASIC's approach to enforcement

 

On 23 March 2020, ASIC announced a recalibration of its regulatory priorities to focus on COVID-19 challenges. ASIC will maintain enforcement activities and continue to investigate and take action where the public interest warrants us to do so, against any person or entity that breaks the law.

 

Whether action is taken depends on the assessment of all relevant circumstances, including what a director or officer could reasonably have foreseen at the time of taking relevant decisions or incurring debts.

 

 

Credits

* This article was first published on the website of the Australian Institute of Company Directors on April 16, 2020.

 

 

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Find below, an explanatory note for context, on Reliefs for financially distressed businesses in The Australian "Coronavirus Economic Response Package Omnibus Bill 2020"

 

 

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The Australian "Coronavirus Economic Response Package Omnibus Bill 2020"

Temporary relief for financially distressed businesses - An Update

March 23, 2020  / By Amelia Kelly and Amy Nolan of DLA Piper

 

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The Australian Government has passed the "Coronavirus Economic Response Package Omnibus Bill 2020". The new legislation was announced on Sunday 22 March 2020 and was fast tracked through parliament as part of the Australian Government's response to the economic impact of COVID-19.

 

The legislation is designed to lessen the economic impact of COVID-19 as a result of cash flow constraints on Australian companies and reducing the threat that otherwise healthy companies that are now experiencing financial distress as a result of COVID-19 avoid the entry into formal insolvency processes to protect directors from personal liability for debts that the company incurs.

 

The amendments are aimed to reduce the closure of Australian businesses during this uncertain period and avoid company collapses. The amendments could not be more pressing, noting the cash flow pressures that businesses are currently experiencing.

 

Insolvent trading

 

The new legislation provides for a relaxation of the application of the statutory insolvent trading provisions under the Corporations Act 2001 (Cth) (Act) and effectively provides for a six-month moratorium against directors having personal liability for trading a company while insolvent (ie it cannot pay its debts as and when they fall due).

 

The statutory provisions imposing personal liability on directors for insolvent trading (s 588G(2) of the Act) will be held in abeyance so that directors will not be liable for debts incurred by an insolvent company if the debt is incurred during the next six months (or longer period if prescribed) and in the ordinary course of its business during that period.

 

The legislation is silent on debts that incurred that are not in the ordinary course of the company's day to day business operations.

 

It is important to note that the moratorium does not apply retrospectively. The moratorium only applies to debts incurred in the next six months. It does not apply to debts incurred before the legislation commences (d).

 

The other notable changes to the insolvency laws include the following:

 

Statutory Demands

  • The monetary threshold to issue a statutory demand has increased - a statutory demand may now only be issued on a company by creditors for a debt of AUD $20,000 or more (previously AUD $2,000).
  • The time limit to respond to a statutory demand has been extended - Companies will now have six months to respond to a statutory demand (previously 21 days).
  • The amendments only apply to statutory demands issued after the legislation commences.
  • The amendments are temporary - they will only apply for six months unless that period is extended.

Bankruptcy

  • The monetary threshold to issue a bankruptcy notice has increased - the threshold debt required before a creditor can initiate bankruptcy proceedings against a debtor is now AUD20,000 (previously AUD5,000).
  • The time limit to respond to bankruptcy notices has been extended - Debtors will now have six months to respond to a bankruptcy notice (previously 21 days).

 

Moving forward

 

While these reforms are a welcome step in the right direction and will go some way to easing the burden of this current crisis on Australian companies, the reforms are silent in respect of the following which will continue to apply without amendment by the current reforms:

 

  • There is no change, moratorium or prohibition on contractual counterparties' rights under a contract if the contract has been breached including rights to discontinue supply or performance, or the rights to enforce security; and
  • There is no change, moratorium or prohibition in the legislation regarding directors' liability for breach of director duties generally whether those duties are under the Act and arise at general law.

 

Therefore, directors should not assume that they are immune from personal liability under the Act, beyond the insolvent trading provisions. Directors should keep abreast of any further developments in this rapidly changing landscape and seek advice on their duties and potential exposure as a result of COVID-19.

 

Further information

 

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