As discussed in our previous blog, in March, the Federal Government put in place temporary relief measures in response to the COVID-19 pandemic which included some relief for personal liability for insolvent trading. These COVID-19 relief measures apply in addition to the existing safe harbour protection introduced in 2017 but were due to cease on 25 September 2020. The COVID-19 relief measures have now been extended to 31 December 2020. Notwithstanding this extension, it is important that directors do not become complacent, continue to be mindful of their ongoing obligations and be prepared for when the temporary relief expires.
There is no doubt that the financial distress suffered by Australian businesses as a result of COVID-19 will not be limited to the discrete 9 month period during which the COVID-19 relief measures apply. Many businesses will continue to suffer for the months and years ahead. It is for this reason that in the lead up to the expiry of the COVID-19 relief measures it will be more relevant than ever for directors and their advisors to consider the safe harbour provisions that existed before COVID-19 (and will continue to be available) and how they may apply to their circumstances. This is particularly relevant if a company is incurring debts that will not be captured by the COVID-19 relief measures.
Directors have a positive duty to prevent a company from trading if it is insolvent. The existing safe harbour protections may provide directors with protection from an insolvent trading claim if they take action at the time they suspect a company is or may be insolvent, which is likely to lead to a better outcome for the company than the immediate appointment of an administrator or liquidator.
The intended purpose of the safe harbour regime is not to provide a mechanism for companies to trade past the point of viability but to allow directors to take considered and reasonable risks. There are several safeguards built into the safe harbour provisions that prevent them from being used if the company is not meeting certain obligations.
Generally, a director is only eligible to rely on the safe harbour protections if, when the debt is incurred, the company has paid its employees’ entitlements (including superannuation) when due and has complied with its taxation reporting obligations.
If these criteria are not met, the director may still be able to utilise the safe harbour protections, so long as they have substantially complied with their requirements or there is no more than 2 failures to comply with these requirements in the 12 month period ending when the debt is incurred. This acknowledges that there may be circumstances when a company has not strictly complied with the requirements, but the director should nonetheless have access to the protections.
A common misconception is that the safe harbour protection is not able to be relied on if a company’s tax debts are not up to date. Whilst the failure to pay tax debts does not automatically prevent a director from accessing the safe harbour protections, it is a matter that will come into play when determining whether a particular course of action will lead to a better outcome for the company. It is also important that directors be mindful of their exposure to personal liability for some company tax related debts such as PAYG, SGC and more recently GST and WET.
- Directors should start thinking, now, about their plans for when the COVID-19 relief measures expire.
- The existing safe harbour protections may provide a means for ongoing relief for directors from insolvent trading. Those safe harbour protections will only apply to directors acting honestly to pursue a reasonable course of action which is likely to lead to a better outcome for the company than administration or liquidation
- It is important that directors keep informed of the company’s financial position
- To maximise the availability of the safe harbour protections, directors should ensure that the company is meeting its obligations to pay employee entitlements and comply with tax reporting obligations
- Directors are reminded to ensure that they are complying with their statutory and common law duties as directors (such as to act in good faith and in the best interest of the company), which apply notwithstanding any relief from insolvent trading
- Finally and most importantly, don’t sit back and wait. Be proactive and seek advice early. If necessary, obtain advice and assistance from appropriately qualified professionals to develop and implement a safe harbour plan.
If you are looking for guidance or advice regarding your rights and obligation as a director, including advice regarding safe harbour, please contact Lauren Crosby to discuss your options.