Directors’ duties under the temporary COVID-19 measures

Directors’ duties under the temporary COVID-19 measures

Temporary relief from personal liability for insolvent trading will apply with respect to debts incurred in the ordinary course of the company’s business.
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Monday, 20 July 2020
By James Cook

An Overview of Directors’ Duties

Directors and officers of companies are subject to a number of statutory and general law obligations, including:

  • Care and diligence: to exercise their powers and discharge their duties with due care, skill and diligence;
  • Good faith and proper purpose: to act in good faith in the best interests of the company, and for a proper purpose;
  • Not to misuse information or position: not to improperly use or profit from their position or information obtained as a director to gain an advantage for themselves or someone else, or to cause detriment to the Company;
  • Avoiding conflicts of interest or duty: to avoid conflicts between the Director’s personal interests and the company’s interests, and between the Director’s duties to the Company and the Director’s duties to anyone else;
  • Financial information: to take reasonable steps to ensure that a company complies with its obligations in the Corporations Act 2001 (Cth) (“the Corporations Act”) related to the keeping of financial records and financial reporting); and
  • Insolvent trading: to ensure that a company does not trade whilst insolvent or where they suspect it might be insolvent.

Temporary safe harbour from insolvent trading

In an effort to create a safety net to lessen the threat of actions that could unnecessarily push companies into insolvency and force the winding up of otherwise profitable businesses, the Australian Government introduced the Coronavirus Economic Response Package Omnibus Act 2020 (“the CERPO Act”) which is designed to provide directors of corporations with temporary easing of insolvent trading laws.

In line with the CERPO Act, section 588GAAA has now been introduced into the Corporations Act and provides directors with a new safe harbour defence to rely on for the incurring of debts whilst trading insolvent.

Directors and their advisors however, should bear in mind that this relief will only apply to debts incurred in the ordinary course of the company’s business and during the period 25 March 2020 to 24 September 2020 and importantly, this does not relieve directors’ of the balance of their fiduciary duties under the Corporations Act.

Where directors seek to rely on section 588GAAA as a defence to trading a company whilst insolvent, they will need to be able to point to a continuing viable business that is supported by appropriate forecasts and/or advice from appropriately qualified professionals.

Continuing to trade an unviable business without a proper plan or strategy exposes directors to personal liability under the relevant statutory provisions of the Corporations Act so it is critical that directors make themselves aware of these provisions and actively manage the company’s financial position on a regular basis.

The safe harbour provisions in section 588GA will remain an important consideration, mirroring, if possible, this new and temporary safe harbour. Accordingly, if the business is insolvent, or likely to become insolvent at any point of time, directors should still ensure they satisfy or explain why they are not able to satisfy the preconditions to safe harbour protections, including to record the strategy in a written plan.

25 September 2020 and beyond

Whilst the Treasury Amendment Bill does contemplate further possible extensions to this timeframe, directors and their advisors should be proactively monitoring the company’s financial position and seek advice from appropriately qualified professionals if the company’s outlook changes.

Early intervention is the key to maximising value for stakeholders and giving the business its best chance of survival.

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