The relief granted for insolvent trading by a director during the COVID-19 restrictions will only apply if the company enters external administration prior to the lifting of the temporary measures (currently 31 December 2020). It is our view that there is no retrospective protection for directors if a company enters administration after this date.
The specific amendment to the Corporation Act 2001 made as part of the Coronavirus Economic Response Package Omnibus Bill 2020 (and extended by the Corporations and Bankruptcy Legislation Amendment (Extending Temporary Relief for Financially Distressed Businesses and Individuals) Regulations 2020) is noted below [emphasis and notes added]:
588GAAA Safe harbour—temporary relief in response to the coronavirus
(1) Subsection 588G(2) [Liability for insolvent trading] does not apply in relation to a person and a debt incurred by a company if the debt is incurred:
(a) in the ordinary course of the company’s business; and
(i) the 6 month period starting on the day this section commences; or
(ii) any longer period that starts on the day this section commences and that is prescribed by the regulations for the purposes of this subparagraph; and
(c) before any appointment during that period of an administrator, or liquidator, of the company.
Importantly, these protections will not apply if a director dishonestly fails to prevent a debt being incurred. In addition, the moratorium is not retrospective and does not apply to debts incurred before 24 March 2020.
Mindful that the Federal Government is now considering very substantial changes to the administration process which might apply to small businesses in particular, changes which we have noted in a previous article ‘A brave new world for insolvency‘
and to be more fully set out in the 6 October budget announcements, we recommend that businesses continuing to experience overwhelming financial distress very carefully consider their position, and immediately obtain specialist accounting and insolvency advice to ensure, as best can be achieved, that full advantage is taken of the temporary protection measures, with the aim to protect personal assets, family homes and business reputations.
Detailed support material is available from the Australian Restructuring Insolvency and Turnaround Association (ARITA) http://arita.com.au
For expert legal advice call 08 8231 6100 or email