In challenging financial times, a company director’s role is fraught with difficult decisions regarding continued operations and the preservation of the business. These decisions may be influenced by the risk of personal liability to the director.

Outlined in, Directors’ Duties in Uncertain Financial Times, we canvassed the issues facing a director when the company’s financial viability comes into question.

The COVID-19 pandemic has placed immense strain across the whole of the economy and raises the issue of how company directors should balance their obligations to shareholders and creditors while ensuring that they protect themselves from any personal liability.

Companies and their directors in the following sectors of the economy face difficult decisions:

As part of its response to the national emergency arising from the spread of the Coronavirus, the government announced changes to insolvent trading duties in March 2020.

This will assist organisations under pressure to keep going, pay necessary staff and be positioned to return to normal business.

The relevant legislation (Coronavirus Economic Response Package Omibus Act 2020 (Cth) (the Act)) came into effect on 24 March 2020.

Critically, the laws have been softened, not repealed, and other directors’ duties remain in place.

The voluntary administration procedure in the Corporations Act was introduced in 1993. Prior to this, the only formal mechanism for a company to compromise with its creditors was by a creditors’ scheme of arrangement, a process often regarded as costly, time consuming and cumbersome.

The primary objective of voluntary administration is to provide for the business, property and affairs of an insolvent company to be administered in a way that:

COVID-19 presents the greatest challenge a generation of corporate managers will see in their lifetime.

This is not the first time the Australian economy has stared down the barrel of a severe economic downturn, but it is the first time the economic conditions that previously underlined robust business models have evaporated overnight due to a public health crisis.

The Australian Government has taken swift action to enact new legislation which significantly changes the insolvency laws relevant to all business as a result of the ongoing COVID-19 related developments.

Snapshot

Introduction:

The Australian Federal Government announced temporary amendments, effective 24 March 2020, to insolvency and corporations law in response to the challenges that businesses are facing as a result of the COVID-19 crisis. These amendments provide a safety net to businesses in challenging times to foster survival for those businesses once the crisis has passed.

On 23 March 2020, in response to the increasing economic threat that the Coronavirus poses, the Commonwealth Government introduced the Coronavirus Economic Response Package Omnibus Bill 2020 (Economic Response Bill). The Economic Response Bill proposes various amendments to the Corporations Act 2001 (Cth) (Act), with the objective of providing temporary relief for financially distressed businesses and promoting business continuity in the current climate.

As part of the its efforts to stem the effects of the COVID-19 pandemic on the Australian economy, the Federal Government has recently introduced a number of ‘safety net’ provisions designed to avoid financially distressed individuals and companies being forced into, respectively, bankruptcy and liquidation.

The objective is to allow them to continue trading where possible.

The reforms

If ever there were times challenging enough for boards to be considering the financial lifeline that is safe harbour from insolvent trading, these are they.

On a daily basis we are reading news of businesses having to shut down and lay off employees and seeing footage of lengthy Centrelink queues. Boards are working harder than ever to govern their organisations in incredibly uncertain times.