The Federal Government has recognised that, in the current virus crisis, directors are likely to need to make urgent decisions about incurring debt. Accordingly, a 6 month safe harbour has been introduced to relieve directors from personal liability for trading whilst insolvent (in breach of s588G of the Corporations Act) provided that he or she can demonstrate that:
- the debt is incurred in the ‘ordinary course of the company’s business’;
- the debt is incurred during the six months following the commencement of the new law (or such longer period as prescribed by the regulations); and
- the debt is incurred before any appointment of an administrator or liquidator of the company during the temporary safe harbour application period.
A director will be taken to incur a debt in the ‘ordinary course of the company’s business’ if it is necessary to facilitate the continuation of the business during the six-month moratorium. However, it is unclear whether a company incurring debt as part of recapitalising during the applicable six-month period would qualify for relief.
Accordingly, directors should take care to ensure that the debt incurred is necessary for the business to survive the current crisis.
Baker Cook Advisory 