Temporary Relief for Financially Distressed Directors: Coronavirus Economic Response Package Omnibus Act 2020 (Cth)

The Coronavirus Economic Response Package Omnibus Bill 2020 received Royal Assent on the 24^th of March, manifesting as the Coronavirus Economic Response Package Omnibus Act 2020 (Cth) (“Omnibus Act”). The Act prescribes, amongst other legislative amendments, temporary changes of 6 months duration to insolvency and corporations laws to assist with financial distress caused by the COVID-19 pandemic.

A general power to vary the Corporations Act 2001 (Cth)       

Schedule 8 of the Omnibus Act adds a new part 9.11 to the Corporations Act 2001 (Cth), prescribing an additional section 1362A, which notes that the Minister may, by legislative instrument, vary the way in which certain provisions of the Corporations Act operate with respect to some classes of persons, provided the Minister is satisfied that:

• it would not be reasonable to expect the persons in the class to comply with the provisions because of the impact of the coronavirus; or
• the exemption or modification is otherwise necessary or appropriate in order to:
  1. facilitate continuation of business in circumstances relating to the coronavirus; or
  2. mitigate the economic impact of the coronavirus.

Any legislative instrument created under this provision ceases to be in force at the end of a 6 month period beginning on the day after the instrument is made (this date is 25 March 2020, unless the instrument itself specifies an earlier date of cessation).

The availability of such a provision means that individuals and corporations must remain up to date on any legislative amendments made to the Corporations Act, and their rights and obligations as such.

Director Duties Generally

Under section 9 of the Corporations Act, a director of a company is a person who is appointed to the position of a director, acts in the position of a director, or is a person according to whose wishes or instructions the directors or body are accustomed to act.

Part 2D.1 of the Corporations Act prescribes several duties for directors, including but not limited to:

• the duty to discharge their duties with the degree of care and diligence that a reasonable person would exercise if they were a director of a corporation in the corporation’s circumstance and had the same responsibilities within the corporation as the director;
• the duty to discharge their duties both in good faith for the best interests of the corporation, and for a proper purpose;
• the duty to not improperly use their position and/or information obtained as director to gain an advantage for themselves or someone else, or cause detriment to the corporation; and
• the duty to disclose any material personal interest when conflict arises.

The impact of COVID-19 has not varied the obligations imposed by Part 2D.1. Persons who are regarded as directors under the Corporations Act are bound by the above obligations to the extent applicable by the provisions conferring the same.

The Duty to Prevent Insolvent Trading

Under section 95A, insolvency is noted to be a state of existence in which a company is unable to pay all its debts, as and when such debts become due and payable. The existence of such a state is qualified by section 95A(2), which notes that “a person who is not solvent is insolvent”. Under section 588G(1), a director who incurs a debt at a time when there are reasonable grounds for suspecting that the respective company is insolvent at that time or by reason of the same debt (or multiple debts), is liable under section 588G(2) for failing to prevent the company from incurring that debt. This duty to prevent insolvent trading occurs if the director is aware at the time of incurring the debt that there are such grounds for so suspecting, or if a reasonable person would so be aware.

Safe Harbour for Directors

Schedule 12, Part 3 of the Omnibus Act, operative as at 25 March 2020, has the effect of inserting the new “safe harbour—temporary relief in response to the coronavirus” provision (section 588GAAA) which provides that the breach provided under section 588G(2) does not apply if the relevant debt is incurred:

• in the ordinary course of the company’s business; and
• during:
  1. the 6-month period starting from 25 March 2020 (the date of operative effect); or
  2. any longer period prescribed by the regulations (NB: no regulations have been issued as at the date of this publication); and
• before any appointment during that period of an administrator, or liquidator, of the company.

The impact of this provision is significant, given debts incurred between 25 March 2020 and continuing for a period does not amount to insolvent trading. Whilst the wording of the provision does not expressly note a direct correlation between the incurring of a debt and COVID-19, directors wishing to rely on the safe harbour provision under section 588GAAA(1) bear an evidential burden (a suggestion of reasonable possibility that a matter exists) in relation to the matter.

Similarly, under a new section 588WA(1) of the Omnibus Act, a holding company may rely on the temporary safe harbour for insolvent trading by its subsidiary if reasonable steps are taken to ensure the temporary safe harbour applies to each of the directors of the subsidiary and to the debt, provided that the temporary safe harbour does so apply. The holding company will however bear an evidential burden in relation to these matters.

Under section 588G(3) of the Corporations Act, a contravention of the duty to prevent insolvent trading amounts to a criminal offence if the director’s failure to prevent the company incurring the debt was dishonest; the term dishonest being defined as “dishonest according to the standards of ordinary people”. Cases of dishonesty under section 588G(3) such as R v Young [2020] QCA 3 are noted to turn on its facts. One should note that the safe harbour provision under section 588GAAA(1) does not afford relief in such cases of dishonesty.

Considering also the imposition of the evidential burden under section 588GAAA(2), the fact that director duties under Part 2D.1 are not varied by COVID-19,  and the Minister’s power to modify and exempt under section 1362A, parties are encouraged to seek legal advice with respect to their rights and obligations under the Corporations Act.