The COVID-19 Response (Further Management Measures) Legislation Act 2020 introduces temporary safe harbours for insolvency-related director duties in the Companies Act 1993. The safe harbours are to assist directors of companies that were viable before COVID-19, not those already in trouble. They provide relief from potential personal liability.
The following director duties in the Companies Act are specifically relevant in the event of insolvency:
The safe harbour provisions are set out in a new schedule in the Companies Act 1993. They essentially provide that a director’s actions will not breach the above duties if, at the time of taking them, the director, in good faith, is of the opinion that:
The safe harbour provisions apply from 3 April 2020 until 30 September 2020, although there is scope for the government to extend the timeframe.
Directors seeking to rely on the safe harbour provisions bear the burden of proving they apply. Good records of decisions and the grounds for them will be critical.
A good faith opinion means an honest belief, which is a relatively low threshold and allows some scope for getting things wrong. Meeting the criteria is not a “set and forget” function. Directors need to constantly review whether the criteria continue to be satisfied, particularly before incurring new obligations.
To be a good faith opinion, directors will need to demonstrate a basis for the view formed including:
The forecasts will need to factor in the prospect of meeting new commitments in addition to existing commitments in a constrained economic environment.
Directors will still need to carry out their other duties under the Companies Act such as exercising reasonable care, diligence and skill and acting in good faith and in the best interests of the company.
*This is based on guidance in the article Directors’ duties during COVID-19 by KPMG and MinterEllisonRuddWatts.