On March 11, 2020, the World Health Organization (WHO) declared that the novel coronavirus (COVID-19) has reached a global pandemic.
The Australian Government though a number of initiatives instituted changes in order to help overwhelmed and overburdened individuals and businesses. Among these:
- On 22 March 2020, the Government announced temporary insolvency relief for financially distressed companies, to help businesses get to the other side of the coronavirus crisis.
- On 25 March 2020, Coronavirus Economic Response Package Omnibus Act 2020 came into force with the intention of providing temporary relief to financially distressed businesses due to the impact of closures, lockdowns, and restrictions associated with the COVID-19 outbreak.
- On 30 March 2020, The Morrison Government introduced a JobKeeper Payment of $1,500 per fortnight, per eligible employee, for up to 6 months.
Directors of companies were put into a favourable position by temporarily eliminating some of the hurdles which may have led to personal liability and the piercing of the veil of incorporation.
Generally, there is a presumption that an incorporated company is a separate legal entity, and independent from its owners and managers.
That being said, there are a number of ways in which this general presumption is counteracted, and the corporate veil is pierced.
Breach of Duties
Directors may breach their core duties under general law as well as the Corporations Act.
Under the corporations act, Directors must exercise their powers and discharge their duties:
- With reasonable care and diligence (s 180);
- In good faith and in the best interests of the company (s 181);
- For a proper purpose (s 181);
- Without gaining a personal advantage from their position (s 182);
- Without gaining a personal advantage from their access to information (s 183).
Breaches of such core duties of directors would lead to personal liability.
Breaches of obligations to the ATO may also have serious consequences of personal liability for directors. The ATO has the power to issue director penalty notices (DPNs) to directors who become personally liable for certain amount of unpaid taxes. Often personal liability of directors may be triggered if directors fail lodgements and/or remittance within the requisite ATO time frames.
Such taxation payments include:
- Pay-As-You-Go Tax Withholding (PAYG)
- Good and Services Tax (GST)
- Superannuation Guarantee Charge (SGT)
Personal Guarantees by Directors
Often used as a means of securing finance and trade accounts, personal guarantees have a function of undermining the protections afforded by incorporation and the presumption of separate legal entity. Personal guarantees are individual’s promises to repay money issued to the company for which they serve as a director.
Breach of Disclosure Obligations
For listed entities, who have a general obligation for “continuous disclosure”, continuous breaches of this duty may result in both civil and/or criminal liability for the company. Furthermore, however, this may result in personal liability for directors (per ss674(2A), 1317E and 1317G of the Corporations Act).
Trading while insolvent
Directors have a positive duty under s588G of the Corporations Act to prevent the company trading while insolvent. The temporary Covid-19 relief package eased the requirements for burdened businesses in complying with insolvent trading. This permitted businesses to continue to incur debt, where objectively the company is insolvent.
Furthermore, the increases of Bankruptcy threshold as well as JobKeeper payments, may have made directors of companies accustomed to, or at least reliant on government initiatives instituted in March of 2020.
We are now in March 2021, and most of the COVID-19 initiatives issued 12 months prior are reaching their conclusion and expiry.
- Temporary Bankruptcy Relief measures ceased on 1 January 2021.
- Temporary relief for insolvent trading ceased on 31 December 2020.
- JobKeeper payments are due to cease on 31 March 2021.
With no further JobKeepers payments, liabilities for companies may increase with less profits to help the business stay afloat.
With no further relief from insolvent trading, directors might very quickly discover that there are trading while objectively insolvent, which would now mean personal liability for the debts incurred by the company.
With the expiry of such relief initiatives, we at Irish Bentley Lawyers, can help you with the management of your company, and the selection of the correct approach to the administration with view of relevant risks, provision of oversight, and compliance with relevant laws.