Legal Insights

The Safe Harbour regime may assist businesses navigating the effects of COVID-19, but directors need to start now

By Marelda Hibberd, Danielle Funston & Isabella Pierri

• 06 April 2020 • 3 min read

Whilst Australia navigates the effects of COVID-19 including health authorities advising people to stay home to contain the spread of COVID-19, people are likely to consume less and spend differently. The ultimate impact on Australian businesses may be significant.

Government Economic Stimulus Package

The Australian Government has implemented assistance measures to support Australian businesses in managing their cash flow and employees during the COVID-19 health crisis. More information as to the assistance available can be found here.

Solvency Concerns

This disruption to business may result in solvency concerns for Australian companies. It is important to note that the Corporations Act 2001 imposes a positive duty on directors to ensure that directors do not cause a company to incur a debt while insolvent, or cause a company to become insolvent by incurring that debt. In Australia, a company will be considered insolvent if it cannot pay its debts as and when they fall due.

However, the Act establishes a safe harbour for directors of an insolvent, or potentially insolvent, company to protect them against personal liability for insolvent trading. For the safe harbour protections to apply, the following criteria must be satisfied:

  • the director suspects the company is or may become insolvent;
  • the company incurs a debt; and
  • the debt is incurred directly or indirectly in connection with one or more courses of action that are reasonably likely to lead to a better outcome for the company than the immediate appointment of an administrator or liquidator.

There are a number of non-exhaustive factors that will be considered in determining whether a course of action is reasonably likely to lead to a better outcome. These factors are:

  1. directors properly informing themselves of the company’s financial position; or
  2. taking appropriate steps to prevent misconduct by officers or employees of the company that could adversely affect the company’s ability to pay all its debts; or
  3. taking appropriate steps to ensure the company is keeping appropriate financial records consistent with the size and nature of the company; or
  4. obtaining advice from an appropriately qualified advisor who was given sufficient information to give appropriate advice; or
  5. is developing or implementing a plan for restructuring the company to improve its financial position.

Whilst directors do not need to demonstrate compliance with each of these factors, it is best practice to attempt to address each matter when seeking to rely on the safe harbour protection.

A director will only be eligible to rely on the safe harbour protection if they are able to demonstrate that the company has:

  • paid all employee entitlements by the time they fall due; and
  • complied with all tax reporting obligations (including lodging returns, notices, statements, applications or other documents), as required by taxation laws.

If the safe harbour protection is available, it will apply retrospectively. It is important that directors seeking to rely on safe harbour protection take detailed notes of all decisions made and do so at every stage of the decision making.

Director Penalty Notices

Legislation has now been passed to include GST in the Director Penalty Notice Regime, effective from 1 April 2020. Only GST debts incurred in the period starting 1 April 2020 or later can be included in a DPN. The 3 month lockdown rules that currently apply to PAYG will be applied to GST as well which means that after 1 April 2020, if the PAYG or GST included by the ATO in a Directors Penalty Notice was reported more than 3 months after the due reporting date (or not at all) then the DPN is “Locked Down” which means placing the company into Administration or Liquidation will not remove the penalty.

Maddocks has produced guides to a range of legal issues raised by the coronavirus (COVID-19). You can access these guides here.

Need advice in responding to COVID-19?

Get in touch with the Restructuring & Insolvency team.

By Marelda Hibberd, Danielle Funston & Isabella Pierri

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