In recognition of the significant economic impact of COVID-19, several jurisdictions have passed (or propose to pass) legislation to provide temporary relief for directors of businesses in financial distress, and hopefully mitigate some of the economic effects of the COVID-19 pandemic.
Relevant Act: Coronavirus Economic Response Package Omnibus Act 2020 (Cth)
Length of Grace Period: 6 months from 25 March 2020 (unless extended by legislative instrument)
The minimum debt which can form the basis for a statutory demand has been increased from AU$2,000 to AU$20,000. The period within which the debt must be paid or an application made to set aside the statutory demand, has also been extended from 21 days to 6 months.
What is covered by the COVID-19 Safe Harbour?
Ordinarily, directors have a duty to prevent the company from trading while insolvent; they can incur personal liability for breaching this duty. The Act has temporarily imposed a moratorium on this insolvent trading liability, relieving directors of this duty (and liability) in respect of debts incurred in the ordinary course of the company’s business during the Grace Period (COVID-19 Safe Harbour). The debt is incurred when the company is exposed to the relevant liability to pay as a matter of substance and commercial reality. A debt is incurred in the ordinary course of the company’s business – it must have been objectively necessary to facilitate the continuation of the business, and the state of the economy is a relevant consideration here. In the context of COVID-19, this can include loans taken by the business to move its operations online, refunds to consumers for goods/services that cannot be provided due to COVID-19, or loans taken to pay business essentials.
What is not covered by the COVID-19 Safe Harbour?
If the debt incurred does not meet both of the criteria above, the directors may have to rely on the existing s588GA safe harbour provision in the Corporations Act. This protection may also be relevant if the company is insolvent at the end of the Grace Period. This section protects directors from personal liability for insolvent trading in circumstances where, on suspecting insolvency, the directors start developing one or more courses of action that are reasonably likely to lead to a better outcome for the company than immediately appointing an administrator or liquidator.
It is important to note that the COVID-19 Safe Harbour does not relieve directors of potential criminal liability for insolvent trading. If the director suspected the company’s insolvency when the debt was incurred and dishonestly failed to prevent the incurring of a debt, the director will be exposed to a maximum liability of AU$420,000.00 and/or 5 years imprisonment.
Directors also remain bound by the statutory duties imposed on them by the sections 180-183 of the Corporations Act, and failure to fulfill any of these duties remains a civil offence.
Relevant Act: COVID-19 (Temporary Measures) Act 2020
Length of Grace Period: 6 months (possible extension for up to a year)
Similar to the Australian approach, Singapore has passed reforms to temporarily increase the monetary thresholds and time limits for insolvency, as well as relieve directors from their duty to prevent insolvent trading.
The monetary threshold to petition for an insolvency of a business is increased from S$10,000 to S$100,000, and the time period to respond, satisfy or set aside a statutory demand is increased from 21 days to 6 months.
Directors will temporarily be relieved from their obligations to prevent their companies trading while insolvent if the debts are incurred in the company’s ordinary course of business, but remain criminally liable if the debts are incurred fraudulently.
Relevant Act: None (expected in April/May 2020)
Length of proposed Grace Period: 3 months from 1 March 2020
Although legislation has not yet been passed, the UK Government has announced a similar intention to suspend wrongful trading provisions for 3 months from 1 March 2020. This will remove potential personal liability for directors who continue to trade in circumstances where they otherwise may have felt obliged to file for insolvency proceedings.
The proposed reforms consist of two new restructuring procedures to assist business survival. The first is a short moratorium where the directors remain in control of the business whilst they seek assistance to restructure it. The second allows for the implementation of a restructuring plan similar to the English Scheme of Arrangement but with the power to cram down creditors across classes. It is also proposed that changes be made to allow companies continued access to supplies so they can continue to trade during the moratorium.
What should directors do now?
Directors should continue to monitor the company’s cashflow during the Grace Period. The various Grace Periods in these jurisdictions do not relieve the company of eventually having to repay its debts, and caution should be exercised when incurring debts in this time.
Directors should realistically assess what the post-Grace Period cashflow is likely to be. The actual and anticipated trading conditions post-Grace Period will be relevant here. If trading conditions do not improve, directors may need to seek insolvency protections, or consider placing the company into voluntary administration or liquidation. However, if trading conditions (and company revenue) improve sufficiently, directors may reasonably expect that the company can meet new liabilities, pay old ones, and ultimately continue to trade. In this case, insolvency protection may not be necessary.
Directors should also consider other arrangements during this time to enable to company to meet its obligations in the long run. This includes informal agreements with creditors and discussions regarding potential refinancing and capital raising. Directors may even wish to consider larger costs reduction strategies or more permanent company restructuring to ensure the company’s long-term survival.