By Clint Fillipou, Principal and Managing Director – Melbourne

6 May 2020

These are strange times to be in business, and especially strange times for the communications, media and creative sectors. Every day we see media growing in relevance, as certain sectors such as news media explode in terms of viewership while others (like OOH) seem to flatline. Every day we see more and more news filter through about vaccine trials, flattening curves, decreasing risks, then increasing risks, etc etc on a raging cycle that constantly reaffirms and contradicts our own understanding of what is happening in the world. Then, as we also adjust to the daily ups and downs of our own social isolation, we continually battle cognitive dissonance as we attempt to reconcile the conflict between “it is just business as usual” and “everything is different”.  In this “new normal” we are seeing many questions coming to us from business leaders about the way that COVID-19 impacts their businesses, and what they should do next.

In this publication we have addressed some common questions we are seeing at the moment, namely:  What exactly are the duties of company directors at times like this?; What constitutes ‘insolvency’ at a time like this, and what are my obligations?  In a later piece we will also clarify What exactly is a ‘force majeure’ clause, and can I set aside a contract for a deal that is dead in the water due to COVID-19?

Directors Duties

Directors have a range of obligations called ‘Directors Duties’ that apply to them by virtue of their position of office within the company. In short, Directors are responsible for managing the corporate affairs of the company and the Corporations Act 2001 (Cth) bestows numerous obligations on them, enforced by ASIC, which can be broadly summarised as follows:

  1. Directors must be up-to-date on the direction and activities of the company, actively participate in the business’ management and in the company’s Director meetings/board meetings;
  2. Directors must not use their position for their own personal benefit or the benefit of others, to the detriment of the company;
  3. Directors must act in good faith and for proper purpose/s in all dealings with the company, and act with due care and diligence, in the best interest of the company;
  4. Directors must not allow the company to trade while insolvent – if they do, the corporate veil may be lifted and they may become personally liable for resultant debts; and
  5. Directors must ensure that proper records of the company are kept.

A company ‘Director’ for these purposes, is not just a person formally appointed to that role by the company. A person (commonly known as a de-facto Director or ‘Shadow Director’) can also be held to be a Director and be subject to Directors Duties if they act in the position of a Director, or if the other appointed Directors are accustomed to act in accordance with the Shadow Director’s instructions. This is regardless of any title or formal position they may have.

Directors Duties are a particularly interesting consideration at the moment, given the havoc that COVID-19 is wreaking on businesses and the companies that own them, nationwide. Indeed, as we know, the federal Government was so concerned about the economic impact on businesses facing a severe downturn in liquidity due to COVID-19 that a raft of emergency legislation was hurriedly passed. That legislation included the measures required to bring the well-known Jobkeeper subsidy into existence, as well as some lesser-known emergency measures to soften the impact of the duty listed at number 4 in the above list, the duty not to allow the company to trade while insolvent – this is discussed in more depth below.

So, given the current COVID-19 landscape, are company Directors exposed more in the time of COVID-19, or less? In short, legally, nothing has really changed for Directors. The Director Duties owed before still apply, and shall remain as strong as this for the foreseeable future. Commercially and in a day-to-day sense of course, Directors are feeling the pressure as their leadership is more needed and being more sorely tested than, in many cases, ever before.

The one legal issue that has softened somewhat in light of the commercial and economic realities of the time is that obligations regarding insolvent trading are a little different, due to the changes made to the insolvent trading provisions in the Corporations Act, discussed now.

Insolvency, Safe Harbour and COVID-19 amendments

In the grips of the COVID-19 panic, in late March 2020 some emergency response amendments were made to the Corporations Act with the passage of the Coronavirus Economic Response Package Omnibus Act 2020. These changes sought to soften the impact of insolvent trading rules, to calm the collective minds of business operators Australia-wide and keep businesses trading. Like the Jobkeeper subsidy in many ways, the change was largely made to calm business leaders and assure them that this bizarre, unicorn/black swan event leading to a gigantic crush on company liquidity would not necessarily mean that company Directors were derelict in their duty and breaching their insolvent trading obligations – the Government knew that without these changes, many businesses would unnecessarily go to the wall because their Directors would have no choice but to appoint administrators/liquidators or else be at risk of breaching their Directors Duties.  Given that a company would be “insolvent” where it is “unable to meet its debts as and when they become due and payable”, many companies would technically be insolvent through no fault of their own, leading to many unnecessary technical insolvencies, many companies being wound up or appointing administrators or liquidators rather than trading through and out of the crisis.

So, practically, what are Directors meant to do right now? In 2017 new ‘safe harbour’ provisions were introduced into the Corporations Act that already gave Directors more protection where they had suspected potential insolvency, but had made positive steps towards correcting the issue in the best interests of creditors, and had incurred debts in the meantime. The safe harbour protection was aimed at facilitating more successful company restructures that were reasonably likely to lead to a better outcome for the company and its creditors, outside of formal insolvency processes.

The new measures introduced in March have temporarily relaxed the insolvent trading obligations further to a degree, as follows:

  • Directors will be temporarily relieved of the Directors Duty to not allow the company to trade while insolvent, where debts incurred were incurred in the ordinary course of business. For instance, if Directors incurred debts in an attempt to move their business online, this would be considered ‘in the ordinary course of business’. This could also include debts incurred through continuing to pay employees during the pandemic. In other words, if a debt is incurred where it is necessary to facitilate the continued operation of the business, during a period of temporary cash flow pressure, there will be a safety net from strict enforcement of this Director Duty. Notably other Directors Duties, such as the duty to act in good faith, still apply;
  • After 25 March 2020, a creditor can only issue a statutory demand if the debt is at least $20,000 (an increase from $2,000), and it must allow the company a minimum of 6 months (up from 3 weeks) for the debt to be paid or for an application to be filed to set it aside. This is important as a company is presumed to be insolvent if it fails to comply with a creditor’s statutory demand. This puts buffers in place against small or short term demands.

For the time being the above changes will last 6 months from 25 March 2020, although time will tell if the Government sees fit to extend the operation of the legislation beyond that timeframe. Importantly, these changes do not represent a panacea for companies and Directors – if the company was in strife before COVID-19, these changes may not help you.

What these changes do achieve is a slight reduction of pressure on business leaders across the country, and build confidence to continue trading and return to financial strength on the other side.

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