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: