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Relief against directors’ personal exposure in COVID-19 times

As part of the government’s economic response to COVID-19, the Corporations Act 2001 (Cth) (Act) has been amended so that subsection 588G(2) does not apply to a person in relation to a debt of a company if the debt is incurred in the 6 months from the date the amendment came into effect.

The amendment came into effect on 24 March 2020 pursuant to the Coronavirus Economic Response Package Omnibus Act 2020.

Ordinarily, if a person fails to prevent a company from incurring a debt when the person is aware at the time that there are grounds for suspecting the company is insolvent (that is, the company can’t pay its debts as and when they fall due) or will become insolvent (or a reasonable person in a like position in the company, in the company’s circumstances, would have been aware that the company is insolvent or will become insolvent), then that person is in breach of section 588G of the Act. Financial penalties would apply to that individual.

However, under the temporary measures, this provision is suspended if the debt is incurred in the ordinary course of business and during the six (6) months commencing from the date the amendment takes effect.

This effectively means the insolvent trading rules are relaxed for the next six (6) months.  Directors of companies do not have to prematurely place their companies into administration or liquidation to protect themselves personally from a claim of insolvent trading later on by a liquidator. They have some time up their sleeve to pursue other possibilities of how they can get their business back on track.

Please bear in mind that this is not a time to incur debt recklessly. The rationale behind the changes is to allow companies the time and opportunity to restructure their financing arrangements with the banks or potentially seek more favourable supply terms with its creditors. It may even mean that company directors seek advice on how to turnaround their business to achieve a better outcome that what would have been achieved had they gone directly to administration or liquidation.

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