Temporary insolvent trading relief – The devil is in the detail

In March 2020, amongst several other economic initiatives set in motion in response to the COVID-19 pandemic, the federal government imposed temporary ‘safe harbour’ relief to directors for breaches of the insolvent trading provisions of the Corporations Act 2001 (section 588G). The relief was due to expire on 25 September 2020; however, was recently extended to 31 December 2020.

What seems to have snuck under the radar is one specific sub-section of the temporary legislation, which has put a different spin on the interpretation of the relief. See the section 588GAAA is set out below, with emphasis added to the sub-section in question:

588GAAA  Safe harbour—temporary relief in response to the coronavirus

1. Subsection 588G(2) [ed: reference to ‘Directors duty to present insolvent trading by company] does not apply in relation to a person and a debt incurred by a company if the debt is incurred:
   a) in the ordinary course of the company’s business; and
   b) during;
       i. the 6 month period starting on the day this section commences;
       ii. any longer period that starts on the day this section commences and that is prescribed by the regulations for the purposes of this subparagraph; and
   c) before any appointment during that period of an administrator, or liquidator, of the company.

As this section is drafted in such a way that all three criteria must apply in order to be eligible, it is plain to see that for a director to rely on the relief; their company must be in either voluntary administration or liquidation before the expiry of the relief, which at this stage is 31 December 2020.

Does this mean we expect to see directors rushing feverishly to enter external administration in December voluntarily? No… in reality, most SME directors have already pushed in all of their personal chips into the business, in the form of personal guarantees for finance, trade credit or leases.

Nevertheless, it is important that you, as an advisor, understand how this quirky and temporary relief provision works. If you have discussions with clients as we approach the expiry of the temporary relief, for example in the context of becoming ineligible for JobKeeper subsidies,  please keep this guidance in mind – the devil is in the detail.