By Liyan Tay
The Government’s legislation changes to insolvency laws that were passed on 23 March 2020 were implemented to provide businesses and their owners with extra protections as a result of the COVID-19 pandemic and avoid unnecessary insolvencies during this crisis period. These relief measures have been extended until 31 December 2020.
Extensions were implemented despite much resistance from some in the business community who saw the measures as delaying the inevitable and resulting in “zombie” companies.
What do these measures mean for directors?
These legislations changes are significant for directors in that they provide an exemption from the risk of personal liability to directors for insolvent trading (safe harbour) in respect of a debt incurred by a company if that debt is incurred:
- In the ordinary course of the company’s business; or
- During the period from 25 March 2020 to 31 December 2020 (based on the extension or any longer period prescribed by the regulations); and
- Before any appointment of an Administrator or Liquidator of the company during the temporary safe harbour application period.
The above serves to provide directors relief from their duty to prevent insolvent trading in order to give companies the confidence to trade through the current crisis, with the aim of returning to viability once it has passed.
Ordinary course of business
It is important to note that this relief only relates to debts incurred in the ordinary course of business that are necessary to facilitate business continuation during the period with exclusions for dishonest and fraudulent activities.
It is therefore incumbent on directors to carefully evaluate whether their company is suffering from temporary liquidity challenges (financial stress) or an endemic shortage of working capital (financial distress/insolvency) in order to plan beyond the COVID-19 survival and consider their long term options.
In essence, directors should consider whether:
- There is a viable business and whether solvency is a concern.
- The business is insolvent but there may be a chance it is still feasible; or
- The business is insolvent and there is no viable option to save the business.
As a result of ongoing business restrictions and the fallout of COVID-19 many businesses will face difficulties well into the new year (2021) whilst the protection under this regime is time-restricted and will only provide relief for debts incurred up until 31 December 2020.
Safe harbour – the time to evaluate is now
Importantly, and perhaps a point that has been missed, is that the temporary COVID-19 safe harbour only applies if a company enters into external administration prior to the lifting of the temporary measures on 31 December 2020.
It is therefore imperative that directors use the next couple of months (to 31 December 2020) to pause and make an honest and objective assessment of their business, the issues facing the company and the amount of reliance placed on government subsidies. As always it is crucial that directors seek expert assistance at an early stage to achieve the best outcome.
COVID -19 has truly presented the greatest challenge in decades to individuals, businesses and the economy. Maintaining business resilience and recovery during these turbulent times will truly be a test to us all.
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