Section 588GAAA of the Corporations Act is part of the Government’s temporary insolvency relief measures for COVID-19. It’s the section that is intended to provide a safe harbour for directors by relieving them from personal liability for insolvent trading during the period when the economy is affected by COVID-19.
There’s an incredible interpretation of section 588GAAA that’s been published and circulating recently, the effect of which is that directors are only shielded from personal liability if they put their companies into voluntary administration or liquidation before the safe harbour period expires (it presently runs to 31 December 2020). This interpretation and its promulgation creates pressure for directors to push their companies off the cliff into external administration before the end of the year because they believe they need to so in order to have the benefit of the protection or even simply to avoid the risk that this “off-the-cliff” interpretation might be right.
But the “off-the-cliff” interpretation is plainly wrong. It does not fit with the ordinary meaning of the words of the section and is inconsistent with the discernible purpose of the provision.
Section 588G(2) makes it a statutory contravention for a director to fail to prevent the incurring of a debt while the company is insolvent if the director is aware or a reasonable person would be aware that there are grounds for suspecting the company is insolvent.
Section 588GAAA(1) provides:
“Subsection 588G(2) does not apply in relation to a person and a debt incurred by a company if the debt is incurred:
(a) in the ordinary course of the company’s business; and
(i) the 6-month period starting on the day this section commences; or
(ii) any longer period that starts on the day this section commences and that is prescribed by the regulations for the purposes of this subparagraph; and
(c) before any appointment during that period of an administrator, or liquidator, of the company.
So the effect of s 588GAAA(1) is that it relieves directors from personal liability under s 588G(2) for debts incurred by the company whilst insolvent if the debt is incurred (a) in the ordinary course of business, (b) during the relief period [which now runs up to 31 December 2020], and (c) before “any appointment during that period of an administrator, or liquidator, of the company”.
Whether s 588GAAA(1) applies depends on whether the relevant debt is a qualifying debt. The three sub-sections (a) to (c) identify qualities that the relevant debt must have for s 588GAAA(1) to be engaged. (a) is concerned with the context in which the debt is incurred and (b) and (c) are concerned with the time at which the debt is incurred.
The literal meaning of (1)(c) is that if there is any appointment of an administrator or liquidator during the relief period then the temporary relief from personal liability doesn’t apply to debts incurred after that appointment. That temporal restriction appears to have been based on s 588GA(1)(b))(iv). Section 588GA, which was inserted into the Act in 2017, provides for a different safe harbour defence from insolvent trading, this one for directors who pursue a course likely to produce a better outcome for the company. Section 588GA(1)(b) sets the end time for qualifying debts for that defence, one of which is “(iv) the appointment of an administrator, or liquidator, of the company”.
The “off-the-cliff” interpretation is that s 588GAAA(1)(c) should be read to mean that temporary relief only applies if there is an appointment made of an administrator or liquidator before the expiry of the relief period.
You can’t get to that interpretation from the natural and ordinary meaning of the words. To begin with, this interpretation seems to read “any” as “the” thereby assuming that there is an appointment rather than assuming that there may or may not be any appointment.
But even reading “any” as “the” wouldn’t be enough. The “off-the-cliff” interpretation ignores that the only requirement for s 588GAA(1) to be engaged is that the relevant debt must satisfy the qualities set out in (a) to (c). Instead, the interpretation reads (1)(c) as not only setting one of the qualities of a qualifying debt but in addition implying a second restriction into s 588GAAA, as if the section began with the words “If an administrator or liquidator is appointed to the company during the period referred to in (1)(b), subsection 588G(2) does not apply…” There is no principle of statutory interpretation that would give rise to that implication.
Nor is it apparent how the “off-the-cliff” interpretation fits with s 588WA. Section 588WA provides protection for holding companies from the liability for insolvent trading by their subsidiaries created by s 588V. The protection depends upon the safe harbour provision in s 588GAAA (or s 588GA) applying and the holding company having taken reasonable steps to ensure that the safe harbour provision applies. On the “off-the-cliff” interpretation, how would that work? The holding company would not know at the time the subsidiary incurs the debt whether the safe harbour applies, but is apparently obliged later (before 31 December 2020), but not at the time the debt is incurred, to take steps to attempt to bring about the appointment of an external administrator? It’s silly.
Implying a restriction on the operation of s 588GAAA to debts incurred by companies that are placed into external administration during the period when the economy is affected by COVID-19 is not necessary for the section to function properly. But it is also inconsistent in two different ways with the intention of Parliament apparent from the language of the Coronavirus Economic Response Package Omnibus Act 2020 (which introduced s 588GAAA) and the Explanatory Memorandum.
First, on the “off-the-cliff” interpretation, directors could not know at the time they incurred the debts whether they would have the benefit of the safe harbour. The director does not know whether an administrator or liquidator will be appointed in the future before the relief period expires. So the section would not give directors confidence to incur debts during the COVID-19 period and continue to trade through that period. Yet the discernible purpose of the safe harbour provision is to encourage companies to trade through COVID-19.
On the other hand, the plain meaning of the section provides certainty for directors at the time they incur the debt: they can make an ordinary commercial judgment as to whether the debt is in the ordinary course of business; they know whether the safe harbour period is ongoing; and they know whether an administrator or liquidator has already been appointed during the safe harbour period.
Secondly, the “off-the-cliff” interpretation is inconsistent with the intention of Parliament to encourage companies to trade through COVID-19 in a different way because it encourages them to stop trading before the COVID-19 hit to the economy ceases.
The Act was the Government’s initial economic response to COVID-19 and the many provisions seek to support businesses, individuals and the economy through the COVID-19 period. The Explanatory Memorandum for the Bill expressly says “The support is designed to help businesses and households through the period ahead.”
Yet the “off-the-cliff” interpretation has the opposite effect. It would produce a perverse incentive for directors. Rather than being encouraged to trade through the relief period so as to be able to continue to operate once the economic effects of COVID-19 had diminished, they would instead be encouraged, if they were concerned about having the benefit of the protection for debts incurred during the relief period, to put their businesses into external administration before that period ends.
It makes no sense. It’s not what the section says. It’s not consistent with Parliament’s intention for the relief measures. And if directors are being given advice that they are not protected unless the company is placed into administration or liquidation before 31 December 2020 then the person putting themselves at risk of liability is not the director.
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