Time for action: temporary safe harbour limitations

By Graeme Scott

The temporary safe harbour introduced by the Federal Government is not a panacea for directors of distressed businesses. It may be time to act now.

The Coronavirus Economic Response Package Omnibus Act 2020 introduced relief measures in the second stage of the Federal Government’s plan to 'cushion the economic impact of the coronavirus and help build a bridge to recovery'.^[1]

The package was expressed to include temporary and targeted relief for companies to deal with unforeseen events that arise because of the coronavirus.

One of the features of the package was an amendment to the Corporations Act 2001 to include a temporary 'safe harbour' to provide relief for directors from any personal liability for trading while insolvent during the relief period.

Prior to the amendment, directors could take advantage of the existing safe harbour under s588GA of the Corporations Act. Safe harbour is available if certain conditions are satisfied, including the director developing one or more courses of action which are reasonably likely to lead to a better outcome for the company, the debt being incurred directly or indirectly in connection with that course of action, the company paying ongoing employee entitlements and complying with tax laws.^[2]

The new, temporary regime commenced on 25 March 2020 and was originally for a period of six months. The Government has announced an extension of the relief period until 31 December 2020.^[3]

Section 588GAAA(1) of the Corporations Act essentially relieves a director from liability for a claim of insolvent trading in relation to a debt if the debt is incurred:

• in the ordinary course of business;
• during the relief period; and
• before any appointment during that period of an administrator, or liquidator, of the company.

The new safe harbour regime has been understood to operate as a safety blanket, to confer broad protection to directors from liability for insolvent trading in respect of debts incurred in the relief period. Indeed, it is unnecessary to invoke the temporary safe harbour; it arises as a matter of course. It is unnecessary for a director to develop a plan or satisfy the other conditions required for the conventional safe harbour.

However, the temporary regime is not without conditions. The words 'during that period' in paragraph (c) create a requirement that an administrator or liquidator be appointed in the relief period. If those words had been omitted, then immunity from insolvent trading would apply to any debt incurred during the relief period regardless of when an insolvent administration might begin – whether before or after the relief period ends.

What the temporary safe harbour provides is a period of respite, but not without imposing a measure of responsibility on directors to keep a keen eye on the business and make a decision about the future of their companies – to trade on or appoint.

Directors of companies which are suffering financial distress, whether that be due to the impact of restrictions imposed during the COVID-19 health crisis or some other reason, will need to consider whether their business is capable of surviving beyond the relief period. If not, then prior to the relief period ending, directors will need to take steps to reorganise their business or appoint a voluntary administrator if they are to take advantage of the temporary safe harbour.

Of course, the conventional safe harbour remains available. If it is difficult to predict the likelihood of a business surviving, but a director does not wish to commit to making a formal appointment within the relief period, then consideration should now be given to developing a formal work-out plan and seeking advice from an appropriately qualified entity.

It remains to be seen whether the Government decides to further extend the relief period. Some are advocating that the temporary safe harbour end to allow those businesses who are struggling to generate cash flow outside of government assistance to fail so that the Government can then focus on those businesses which are sustainable. However, whatever decision is made, by the time it is announced, the window of opportunity may have contracted, leaving only an unenviable decision for them.

Perhaps, now is the right time for action.

[1] Joint media release of The Hon Josh Frydenberg MP and The Hon Scott Morrison MP Prime Minister, 'Supporting Australian workers and business'.

[2] See our earlier article, 'Good reasons for directors to comply with safe harbour during insolvency trading moratorium' by Scott Butler and David Dickens.

[3] Joint media release of The Hon Josh Frydenberg MP and The Hon Christian Porter, 'Extension of temporary relief for financially distressed businesses'.