With the impact of COVID-19 well and truly being felt by business, many may be heartened by the Government’s recent temporary changes to insolvency laws. What all directors need to remember however, is that their conduct is not only policed by sections 588G and 588M of the Corporations Act 2001 (Act), but also by sections 180-183 of the Act.
Sections 180 to 183 of the Act set out a director’s statutory duties or obligations. These include:
- 180 Care and diligence
- 181 Good faith
- 182 Use of position
- 183 Use of information
These duties prevail despite the recent changes brought in by the Coronavirus Economic Response Package Omnibus Bill 2020 (Bill). As such, even though the changes provide for a temporary reprieve from claims for trading whilst insolvent, a director still may be caught out in respect of an alleged breach of sections 180 and 181.
It therefore remains incumbent upon directors to ensure that they have a proper basis for continuing to incur debt and that they’re not wilfully blind to the potential (or actual) financial difficulties being faced by their company.
This is not to say that businesses should cease trading during this period of uncertainty, on the contrary, these duties have always been there and those companies engaging in proper financial hygiene and taking steps to stay informed through obtaining the right advice should not fall foul of the statutory duties.
What directors should be mindful of, is approaching the breathing room afforded by the Bill as a get out of jail free card and engaging in risky, speculative and poorly advised behaviour. This is true in respect of both incurring debts, and entering into contracts or other such arrangements.
It’s not all doom and gloom though. Just like a s588G and s588M claim for trading whilst insolvent, a claim for trading whilst insolvent pursuant to any of the statutory duties is also difficult for the prosecuting party to prove. However, once a claim is made, directors are locked into litigation which is not only costly, but time consuming. So best practice would be to try and ensure that directors are complying with their duties to avoid any potential claims.