In our April legal update we provided commentary on temporary changes to the insolvency/bankruptcy regimes in the Corporations Act and Bankruptcy Act that were implemented to assist businesses and individuals navigate through Covid-19.

One of the changes was a new, temporary,  ‘safe harbour’ provision so that the directors of a company that incur a debt while the company is insolvent (or the company becomes insolvent as a result of incurring the debt) will not contravene the Corporations Act and those directors will not contravene their personal duty to avoid insolvent trading.  This temporary safe harbour that was to originally expire in September 2020, but has now been extended to 31 December 2020.

However, notwithstanding the extension to the safe harbour period, directors will need to be aware of the wording of the temporary ‘safe harbour’, particularly paragraph (3) set out below, and a director’s ability to rely on the safe harbour.

The temporary safe harbour provides that subsection 588G(2) of the Corporations Act (which is the duty on a director to avoid insolvent trading) does not apply in relation to a person and a debt incurred by a company if the debt is incurred:

1. in the ordinary course of the company’s business; and
2. during the period commencing on 25 March 2020 and ending when the temporary safe harbour is revoked (which is currently expected to be 31 December 2020); and
3. before any appointment during that period of an administrator, or liquidator, of the company.

Therefore, the wording of this safe harbour provision appears to suggest that, in addition to satisfying paragraphs (1) and (2), to rely on the safe harbour an administrator or liquidator must be appointed by the directors prior to the end of the safe harbour period.  That is, the safe harbour will not apply, and directors of the company could still be liable for debts incurred during the safe harbour period, unless an administrator or liquidator is appointed prior to the end of the safe harbour period.

Please get in touch with the Sierra Legal team if you have any queries.