What is the temporary COVID-19 insolvency safe harbour?

The federal government has announced a six-month temporary relief period from personal liability for trading while insolvent, designed to give directors confidence to trade through the current crisis without pressure to enter their organisation into administration if there is a chance it might be insolvent.

Directors will be able rely on the temporary relief in relation to a debt incurred by the company from 24 March, when the new law commenced, if the debt is incurred in the “ordinary course of the company’s business”.

See here for further information on the COVID-19 insolvency safe harbour.

What does “debt incurred in the ordinary course” mean?

The government has explained that a debt is incurred in the ordinary course if it is necessary to facilitate the continuation of the business during the 6-month period that commenced on 25 March. The Government gives the examples of taking out a loan to move some business operations online or incurring debt to continue paying employees.

How does the COVID-19 insolvency safe harbour interact with the existing Corporations Act safe harbour that was enacted in September 2017?

The COVID-19 insolvency safe harbour has been designed to give directors the confidence to continue to trade, pay their bills and retain staff through the COVID-19 crisis without pressure to enter their organisation into administration if there is a chance it might be insolvent. Directors seeking to rely on the COVID-19 insolvency safe harbour will need to be able to satisfy themselves that their company has the ability to recover quickly and return to solvent trading once the six-month relief period ends.

However, for some businesses the current crisis will have a greater economic impact on the underlying financial position and more significant steps may be needed to manage existing debt and creditors. In these circumstances, the existing insolvency safe harbour enacted in 2017 under the Corporations Act can offer protection beyond the temporary six-month relief period, particularly for directors considering options such as significant restructures for more long-term business survival. Eligibility for the existing insolvency safe harbour is conditional on meeting employee entitlements, tax reporting obligations and directors fulfilling existing statutory obligations to provide assistance in the event of administration or liquidation. See the AICD insolvency safe harbour tool for further information.

Does the insolvency safe harbour apply to not-for-profits and charities?

The ACNC has confirmed that the temporary insolvent trading safe harbour will extend to directors of not-for-profits and all charities (not just those that operate as companies limited by guarantee), provided charities (i) have an achievable aim to return to viability once the crisis has passed and (ii) inform members and the ACNC if trading insolvent.

Directors of charities and NFPs structured as companies limited by guarantee will benefit from the temporary insolvent trading safe harbour, which provides temporary relief for directors from personal liability for trading while insolvent. See here for further information.

It is not clear, however, whether committee members of incorporated associations (which are regulated separately in each State and Territory) are afforded the same relief. At time of writing, the state of play is as follows.

Victoria and Northern Territory

Committee members of incorporated associations in Victoria and the Northern Territory benefit from the temporary coronavirus insolvency safe harbour by virtue of the incorporation of the Corporations Act into the relevant legislation.

However, in the Northern Territory there is no protection from the separate offence under the Associations Act 2003 (NT) of incurring debts not likely to be paid. In other words, while committee members will not be personally liable for trading while insolvent, they could be found liable for incurring debts if they do not believe these are likely to be paid.

NSW, South Australia and Western Australia

At this time, committee members of incorporated associations in NSW, South Australia and Western Australia do not benefit from the temporary coronavirus insolvency safe harbour available to directors.

In response to our advocacy efforts, NSW Fair Trading has stated it:

“will not take action in relation to debts incurred, which are likely to result in insolvency, in the ordinary course of a co-operative or association’s activities, where those debts may be necessary (for example in relation to employee expenses), in a similar manner to measures implemented by ASIC...”

The AICD welcomes this statement from NSW Fair Trading but remains concerned about creditor actions and is continuing to advocate for a legislative amendment. We are also speaking with the equivalent bodies in South Australia and Western Australia to ensure committee members of associations benefit from the same relief available to NFPs and charities structured as companies limited by guarantee.

Queensland, Tasmania and ACT

There is no duty imposed on committee members of incorporated associations in Queensland, Tasmania and ACT to prevent insolvent trading. However, ACNC registered charities must of course comply with the ACNC obligations outlined above.