Because of the financial impact of COVID-19 on many businesses, the Government has announced it's intention to change the Companies Act 1993 around Director's duties and reckless trading, also known as trading whilst insolvent.
Keeping Business Moving After COVID-19
In these times of uncertainty it is hoped that removing the fear of Directors operating and continuing to operate their business while technically insolvent due to a cash flow restrictions brought about by the COVID-19 Alert Level 4 shutdown, will improve the liquidity of debtors and the general economic conditions.
The amendments propose to introduce a ‘safe harbour’ provision to the act to allow the Director to continue to trade without fear that a liquidator will come after them after at some later time for trading when clearly insolvent.
Both the United States and Australia have this type of commercial provision. We assume at this stage (there being no legislation or bill yet drafted) that the provisions of the alterations anticipated by the Government will follow the Australian model.
What Is A 'Safe Harbour' Provision?
The underlying aim of the Australian 'safe harbour' provisions in their Companies Act is to achieve a better outcome for the company and have an opportunity to explore various turn around strategies rather than the immediate appointment of a liquidator or voluntary administrator. That in itself opens up questions as to what a ‘better outcome' may be defined as.
In short, the 'safe harbour' allows Directors to be not personally liable for the debt of the company (other than by way of any personal guarantee or other security that may have been signed by the director in their personal capacity) and can rely on 'safe harbour' protection whilst they are developing courses of action which are likely to lead to a better outcome for the company and its creditors rather than being pragmatic or fearful and placing the company into voluntary liquidation when there is a possibility that it may, given time, be able to trade its way out of trouble once it is back up and running.
What Does 'Safe Harbour' Trading Look Like?
It is anticipated that it will not be a ‘get out of jail free’ card and normal business prudence will need to be followed. That would include continuing to maintain accurate books and records to allow the Director to be constantly informed of the company’s financial position. We recommend that the Director obtain regular and frequent updates and progress reports around the company's solvency position.
Secondly it is anticipated that proper legal and financial advice is being sought from qualified professionals by any Director or company seeking to exercise the 'safe harbour' provisions. It's also assumed that Directors would form a 'Turn-Around Plan' at a very early stage and that appropriate steps are taken to prevent any misconduct by Companies Officers or staff thinking that the 'safe harbour' provisions will mean that they are immune from enquiry further down the track.
What is 'Debt Hibernation'?
The Government has also signaled a new provision loosely termed as 'hibernation'. It is anticipated that this will allow the company to effectively park existing debt during the shutdown period until the company is able to start trading normally again. The key word here is “normally" and again we are assuming that that provision will in fact be incorporated into the ultimate legislation.
To place the debts into hibernation the consent of 50% of the creditors will be required it is not clear at this stage whether that will be a 50% by value or by number test.
Ask Us About 'Safe Harbour' Trading
Godfreys Law are running a Zoom webinar on Thursday 16th April at 3:30pm addressing some of these new concepts. To register please click here to receive full details. Once we have explained these new concepts as we understand them, we'll answer your questions. You can use the Zoom Q&A function within the webinar, or you can email us questions in advance.
Please however bear in mind that until Parliament resumes sitting, the legislation will not be known and that we will of necessity be talking in generalities when considering what these changes may mean. The legislation will be back dated to Thursday the second of April