One of the lifelines that was thrown to businesses from the Government during the pandemic was a blanket form of “Covid Safe Harbour”. This temporary version of Safe Harbour was introduced by the Federal Government, offering protection to Directors against personal liability for debts incurred by a company trading whilst insolvent to 31 December 2020 (‘the Covid Period’).
Thus, a Director will not be personally liable for insolvent trading in respect of a debt incurred by a company if the debt is incurred:
- In the ordinary course of the Company’s business; and
- During the temporary Safe Harbour application period beginning 25 March 2020 to 31 December 2020; and
- Before any appointment of an Administrator or Liquidator of the company during the temporary Safe Harbour application period.
Covid Safe Harbour is quite different to actual Safe Harbour. It is very important that you understand the difference. As a general rule, Covid Safe Harbour is protection from insolvent trading where an appointment of an Administrator or Liquidator of the company occurs between now and 31 December 2020. Appointments that occur within the Covid Period, will result in a corresponding immunity for the directors (for insolvent trading) for the entire Covid Period.
The primary problem with Covid Safe Harbour – is that it only works when you enter external administration during the Covid Period – enter a day outside the Covid Period and it will be as if you never had any Safe Harbour at all.
Irrespective of the measures, Directors should not continue to trade a company if there is no prospect of profitability without the influx of stimulus packages by the Government. If the company does not go into Administration or Liquidation, it will continue to incur debts, the burden of which will transfer to creditors who in turn may also not be able to survive the financial burden and directors are exposing themselves to greater personal liability.
Directors should be aware the protection against personal liability from insolvent trading is not an absolute safeguard and Liquidators may still initiate legal action against directors for breaches of director’s duties. The Corporations Act 2001 requires Directors amongst other requirements to act with care and diligence, act in good faith and in the best interest of the company and for a proper purpose.
If you are thinking of placing a company into external administration after 31 December 2020 – you should ensure you check whether you are going to be liable for insolvent trading. Many company Directors will be thinking that there is blanket protection in place for their businesses. This is not true.
The temporary Safe Harbour was only a stop gap for Directors to make a decision about the future of their companies – either appoint an external administrator or accept the risk of insolvent trading. It is absolutely necessary for you to consider where the business currently sits. You may not need to take action now but if you are a Director you need to be aware of the looming deadline and consider the implications.
If you are a Director whose company is in financial distress and are concerned about your personal exposure, contact us today to speak to one of our representatives. Acting early gives you more options with which to navigate through these difficult times and can mean the difference between saving and losing your business.
At Corporate Lifeline we will tell you everything you need to know and give you the best possible solution for your circumstances. Speak to us today.