Safe harbours for directors in insolvency circumstances
The COVID-19 Response (Further Management Measures) Legislation Act 2020 has created safe harbours for directors in insolvency circumstances. The intention of the changes is to provide a platform for businesses to continue to trade through and out of the COVID-19 crisis rather than prematurely winding up as a result of it.
The safe harbours provide that a director will not be in breach of their duties in relation to reckless trading and obligations if, at the time of incurring the obligation or taking the action, the director is of the good faith opinion that:
the company is facing or is likely to face significant liquidity problems in the next 6 months as a result of the effects of COVID-19 on the company (or its debtors or creditors); and
it is more likely than not that the company will be able to pay its debts as they fall due on or after 30 September 2021 (or a later date if extended by regulations).
In respect of the director’s opinion, the director may have regard to the likelihood of trading conditions improving, the likelihood of the company reaching a compromise or other arrangement with its creditors, or any other matters the director considers to be relevant. Advice should be taken and appropriate forecasting done (and revisited) so that directors can show that such opinions were held in good faith.
The safe harbours will only apply to directors of companies which were able to pay their debts as they fell due on 31 December 2019 (or possibly an extended date under regulations) or for companies incorporated from 1 January 2020 to 24 March 2020. The requirement to be able to pay debts as they fell due on 31 December 2019 will be assessed objectively. Given this, accounting advice should be taken if there are any doubts as to the solvency of the company at this time.
Directors should keep in mind that even where they can rely on the safe harbours, their other duties will continue to apply, for example, the duties of good faith and due care and skill.
The changes will apply retrospectively from 3 April 2020 and continue until 30 September 2020 (or a later date if extended by regulations made under the Act).
If you have any questions or would like advice in respect of any legal matter you are facing (whether related to COVID-19 or not), please contact your usual point of contact at Kemps Weir or contact us here.
Disclaimer: This publication should not be construed or acted on as legal advice. It is brief and general in nature. Specific advice should be sought.