Monday, April 20, 2020 / 07:57AM / By ASIC
Commissioner John Price* / Header Image Credit: AICD and ASIC
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
- during the six-month period
commencing from 25 March 2020 (or a longer period as prescribed by the
- before any appointment of an
administrator or liquidator during the temporary safe harbour application
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
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
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
* This article was first published
on the website of the Australian Institute of Company
Directors on April 16, 2020.
Find below, an explanatory note for
context, on Reliefs for financially distressed
businesses in The Australian "Coronavirus Economic Response Package Omnibus
The Australian "Coronavirus
Economic Response Package Omnibus Bill 2020"
relief for financially distressed businesses - An Update
Amelia Kelly and Amy Nolan of DLA Piper
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
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
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:
- 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
- The amendments are temporary - they will only apply for six months
unless that period is extended.
- 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).
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.
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