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Danger – COVID-19 Safe Harbour STILL Requires Early External Administrator Appointment

The Government has recently extended COVID-19 business protection measures introduced in March, including the temporary safe harbour protection from director liability for insolvent trading. These protections will now expire on 31 December 2020. However the Government has not corrected a critical timing issue which exists in the COVD-19 safe harbour legislation. This means directors must appoint an external administrator to their company on or before 31 December 2020, if they wish to take advantage of the COVID-19 safe harbour protection from insolvent trading.

In March Parliament passed a raft of legislative reforms in an attempt to provide protections for businesses an ameliorate the economic effects of the coronavirus in Australia. One of these amendments was temporary legislation to protect directors from liability for insolvent trading during the global COVID-19 pandemic. This temporary protection is found in section 588GAAA of the Corporations Act 2001 (Cth). This safe harbour protection from insolvent trading will mean that directors will not be personally liable for debts incurred in the ‘ordinary course of business’, provided those debts were incurred during the operation of the temporary legislation, presently which will now expire at the end of 31 December 2020.
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Insolvency Relief Extended until New Years!

By Hayley Hitch, an Associate of Matthews Folbigg Lawyers in our Insolvency, Restructuring and Debt Recovery Group


The Morrison Government earlier this year introduced the Coronavirus Economic Response Package Omnibus Act 2020 (Cth) which came into effect on 25 March 2020 to provide relief to individuals and entities under the Corporations Act 2001 (Cth), Bankruptcy Act 1966 (Cth) and supporting legislation. These changes were due to expire on 25 September 2020, where the legislation was expected to revert back to its former position where, for example, statutory demands and bankruptcy notices required a 21 day response period.

You may recall our earlier blog which goes into some detail about these changes, this may be viewed here.

The Morrison Government has however today extended the operation of the relief provided (and described above) until 31 December 2020. This means that:

  1. Any statutory demands issued under the Corporations Act 2001 (Cth) on or before 31 December 2020 will need to provide the debtor with a period of 6 months to respond and be for at least $20,000;
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Danger – COVID-19 Safe Harbour Flaw Requires URGENT External Administrator Appointment

A fatal flaw exists in the government’s COVD-19 safe harbour legislation. This means directors must appoint an external administrator to their company on or before 24 September 2020, if they wish to take advantage of the COVID-19 safe harbour protection from insolvent trading.

At the beginning of the global pandemic the Australian Federal Government introduced temporary legislation to protect directors from liability for insolvent trading during the global COVID-19 pandemic. This safe harbour protection from insolvent trading will excuse directors for liabilty in respect of debts incurred in the ‘ordinary course of business’ during the operation of the temporary legislation, presently due to expire at the end of 24 September 2020.

However, for reasons which are not clear, but possible linked to the urgency with which the legislation was passed, the drafters included an additional fundamental and crucial requirement to gain the benefit of this COVID-19 safe harbour protection from insolvnt trading. That requirement is that in order to gain this COVID-19 safe harbour protection, an external administrator (either a voluntary administrator or a liquidator), must have been appointed before the legislation expires at the end of 24 September 2020.
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COVID-19 –What Debt will Scuttle Passage to the New Safe Harbours?

By Ellen Ferris, a Solicitor in Matthews Folbigg’s Insolvency, Restructuring and Debt Recovery Group.

Amendments in March of this year have brought about changes to the Corporations Act 2001 which allow for an additional temporary safe harbour to protect directors from insolvent trading, –  see our blog here.

However, companies do not automatically qualify for the protection. To qualify, the debt must be incurred as follows:

  • In the ordinary course of the company’s business;
  • During the six month period starting from the date the new law commenced (being 24 March 2020); and
  • Before any appointment of an administrator or liquidator.

The evidentiary burden of proof is on the person seeking to rely on the safe harbour relief, which means that it will be up to directors to make sure they obtain and keep evidence that their debt meets the criteria.

According to the explanatory memorandum in respect of the amending legislation, a director will be taken to have incurred a debt in the ordinary course of business if the debt “is necessary to facilitate the continuation of the business during the six month period that begins on commencement of the subparagraph”. This is narrower than the criteria for the existing safe harbour provisions, which focus on debts incurred in the pursuit of a course of action likely to lead to a better outcome for the company than liquidation. The Explanatory Memorandum gives the following examples for debts incurred in the ordinary course of business:
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Insolvent Trading Advice for Clients Affected by COVID-19

By Ellen Ferris, a Solicitor in Matthews Folbigg’s Insolvency, Restructuring and Debt Recovery Group

In the current climate, many accountants may have clients experiencing financial distress, including directors seeking advice on how to avoid personal liability for trading whilst insolvent.

What advice should accountants be giving their clients in this environment? What advice do directors need to hear?

Insolvent Trading – The Danger

Firstly, it is important to understand how the law defines insolvent trading. The law defines insolvency as an inability to meet debts as and when they are due and payable. Insolvent trading, in simple terms, relates to debts incurred whilst a company is insolvent.

Secondly, however, determining insolvency at any point in time is a very complex assessment.  It does not include a temporary shortage of liquidity, but looks at the company’s assets as a whole and its cash-flow.  In the current COVID-19 climate, many businesses will be experiencing temporary liquidity problems, however the questions is whether these are going to lead to longer term shortages of capital.  Given what is going on in the world, who knows?
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DEBT COLLECTION IN A SAFE HARBOUR

Debt collection commentary by Darrin Mitchell, Senior Associate at Matthews Folbigg in the Insolvency, Restructuring and Debt Recovery Group.

Credit Managers should be aware of the reforms made to the Corporations Act 2001 (“the Act”) that attempt to create a shield for directors of companies that believe their company is in financial stress and how it affects their debt collection strategies.

Changes in September 2017 to the Act created section 588GA and deal with specific actions taken by directors in relation to debts incurred after 19 September 2017. These reforms are commonly referred to as the “Safe Harbour Reforms”.

It idea behind the reforms is to assist directors by not penalising them should they recognise their company is in financial distress and seek professional advice from an “appropriately qualified entity” to get out of that situation.

If when a debt has been incurred the director has a suspicion that their company is, or may become, insolvent, and they are attempting to trade out of that position with advice from the appropriately qualified entity, then the director may be protected from the insolvent trading provisions under the Act.
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