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COVID-19 Insolvent Trading Safe Harbour Protection

COVID-19 Insolvent Trading Safe Harbour Protection

Correct as at 12 November 2020

Early in the COVID-19 pandemic, the government made emergency amendments to insolvency laws, including protection from insolvent trading liability.  This protection is due to expire on 31 December 2020.

As currently legislated, this protection would cover any debts incurred by the company between 25 March and 31 December 2020 (the safe harbour period), but only if directors take protective action by appointing an administrator or liquidator before 31 December 2020.  In other words, directors could be held personally liable under the insolvent trading rules for debts incurred during the safe harbour period unless they appoint an administrator or liquidator by 31 December 2020.

It is possible that the above is an unintended outcome of the emergency amendments, and we understand that insolvency industry bodies have made representations to Treasury about a legislative solution.

In the meantime, company directors should give careful consideration to whether their company can continue to meet its debts as and when they fall due.  If not, they should take urgent steps to seek alternative safe harbour protection by:

  • Seeking traditional safe harbour protection under section 588GA of the Corporations Act. A director’s guide on this protection can be found on the Australian Institute of Company Directors website.
  • If Traditional Safe Harbour protection isn’t feasible, it may be necessary to appoint an administrator by 31 December 2020.

Obviously we do not want to be the prophet of doom, but if your business is struggling with the effects of the COVID-19 crisis, you need to think seriously about your position, especially with the risk you may be exposed to as a company director after 31 December 2020.

If you have any concerns about the solvency of your company, please contact us urgently so that we can help guide you through the options.

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