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The ongoing effects of the COVID-19 pandemic are making it difficult for many businesses to stay financially viable. As a business director, you may be concerned about risking an insolvent trading claim if your business is incurring debt. Or additionally, if safe harbour provisions are at play, an alleged breach of your director duties. 

The temporary changes to the safe harbour provisions made in March 2020, designed to help manage the effects of the pandemic, have now come to an end. Therefore, if your business is taking on debt, you need to have a clear and viable plan that will facilitate your business’s continuation. You should also consider your risk exposure and general obligations, and implement protections to insolvent trading claims. 

This article explains:

  • the safe harbour regime;
  • what may prevent you from relying on this regime; and
  • whether your obligations as a director have changed. 

The Safe Harbour Regime 

The safe harbour regime was introduced in 2016, providing some protection to directors who are making decisions for their company in times of financial difficulty. The safe harbour regime may apply when:

  • a director incurs debt that is ‘reasonably likely to lead to a better outcome for their company and its creditors’, rather than the company going into voluntary administration and/or liquidation; and 
  • the debt acquired relates to those actions. 

Further, directors can utilise the safe harbour protection as a defence if their company goes into liquidation and a liquidator seeks to pursue a claim against them personally for insolvent trading.

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Extended Protection Has Now Expired 

The federal government introduced temporary changes to the safe harbour regime at the height of COVID-19. These temporary provisions extended director protection to cover debts incurred by a company in the ordinary course of business, during the period 25 March 2020 to 31 December 2020. The extension incentivised directors to continue trading when:

  • they might ordinarily be uncomfortable with the risk exposure; and 
  • more likely to enter into voluntary administration or liquidation

These temporary extensions to the safe harbour regime expired on 31 December 2020.  

It is important for directors to note that the safe harbour regime’s extended protections only apply to companies that: 

  • incurred debt between 25 March and 31 December; and
  • were placed into administration or liquidation prior to 31 December 2020.

What Happens Now?

The safe harbour regime protection provided to directors has reverted to its pre-COVID position.  

Directors have reason for concern if:

  • they incurred company debt in the ordinary courses of business between 25 March 2020 to 31 December 2020; and 
  • that company is insolvent and now facing liquidation in 2021.  

Additionally, directors of companies that are placed into liquidation in 2021 will only be able to seek safe harbour protection against a claim for insolvent trading if they can meet the usual pre-COVID requirements outlined above.  

Moving forward into 2021, directors must have a clear and viable plan that will facilitate your business’ continuation when taking on debt. Keeping clear records of why and how you make decisions will be of assistance should you need to use the safe harbour protection. 

Ultimately, as a director, you should consider your obligations to act with care and diligence and obtain advice prior to entering into commitments that may expose you to a claim of insolvent trading in the future.

What Prevents Me From Relying on the Safe Harbour Regime?

As a director, you may not be entitled to rely on the safe harbour regime’s protections unless your company has:

  • paid all its employees their entitlements; and 
  • complied with its tax obligations. 

Have My Director Obligations Changed Since COVID-19?

Your duties as a director of a company have not changed.

You have an ongoing duty to act in the best interests of the company, including in the interests of shareholders. Furthermore, your duty to act with care, diligence and good faith is important in the current climate of financial uncertainty. 

If your company goes into liquidation, then a liquidator may scrutinise your decisions as a director if they show a clear lack of consideration and an indifference to your duties. As a director, you could also be personally liable if you have acted in a fraudulent and dishonest manner.  

Directors are not the only people exposed to these duties. A company’s officers, people who have the ability to affect the financial standing of the company, may also be subject to these duties.

Key Takeaways

The temporary extension to the safe harbour regime has now come to an end. Therefore, directors of companies that are now facing liquidation in 2021 will only be afforded protection for insolvent trading under the safe harbour regime if they can satisfy the pre-COVID requirements. As a director, it is important that you seek appropriate advice, keep records and make decisions with your duties. This will reduce the risk of exposure to a claim by a liquidator for insolvent trading, should your company be placed into the hands of an Administrator or Liquidator.

If your company is struggling to remain financially viable and facing insolvency, we are able to assist by guiding you through these processes. It is important to understand your obligations, options and rights. If you need assistance in relation to insolvency, contact LegalVision’s insolvency lawyers on 1300 544 755 or fill out the form on this page.   

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