Unmasking directors’ duties and insurance during COVID-19 and the insolvency moratorium

On 6 September 2020, the Federal Government announced that there would be an extension of temporary relief for Australian businesses facing financial distress as a result of COVID-19.

The Coronavirus Economic Response Package Omnibus Act 2020 (Cth) (CERPO) provides an economic response to COVID-19 by temporarily amending select legislative and regulatory frameworks. Directors of companies should be aware that most of their duties and obligations survive the CERPO amendments. For further information about CERPO, please visit the Cornwalls COVID Hub.

CERPO Framework

CERPO amended, among others, the Corporations Act 2001 (Cth) (Act) and the Corporations Regulations 2001 (Cth) (Regulations). In particular:

• the insolvent trading regime has been suspended. Directors are excused from personal liability if debts are incurred in the ordinary course of the company’s business and during the period of suspension; and
• the statutory demand regime has also been modified. The statutory minimum for a statutory demand is raised from $2,000 to $20,000, while the statutory period for a company’s response is extended from 21 days to 6 months.

Notably, Schedule 12 of CERPO does not modify the statutory or common law duties of directors during this period of suspension.

The amendments to the insolvent trading and statutory demand regimes took effect on 25 March 2020 and were to expire on 25 September 2020. However, the Federal Government announced that it will continue to provide regulatory relief for Australian businesses that continue to be impacted by the coronavirus crisis, by extending the temporary relief measures to 31 December 2020.

Directors’ duties

In addition to the duty to not trade while insolvent, company directors are subject to a number of other strict duties under the Act and the common law, which include the duties to:

• act in the best interests of the company;
• act in good faith;
• act with reasonable care and diligence; and
• exercise their independent judgment in making decisions and exercising their powers in respect of the company.

In practical terms, this means that company directors ought to familiarise themselves with the duties associated with that position, and to comply with those duties as carefully and diligently as possible. A failure to comply with these duties, including the more specific duties set out in the Act, can result in personal civil and/or criminal liability for directors.

The serious consequences of a breach of duties are often a source of concern for company directors. However, if a company director is doing their best to act in accordance with their statutory and common law duties, insurance can be relied upon to cover that director for breaches of their duties in certain circumstances.

Directors and officers’ liability insurance

Directors and officers’ liability insurance (D&O Insurance), also known as management liability insurance, is available to persons who may benefit from cover.

Given the extensive duties of a director, and the responsibilities of persons managing a company, D&O Insurance can offer protection for a company and its directors and officers in the face of allegations of mismanagement or failure to satisfy their numerous duties. However, this protection is not unfettered:

• Policies usually contain notification provisions which require notice to be provided to the insurer of a claim or information that may indicate a future claim as soon as possible. When referring to the notification provisions, ensure that your mind is turned to the reporting period and the availability of extensions. Claims lodged outside of the reporting period are at risk of being rejected by an insurer.
• It is important that the events giving rise to the claim occur during the period of coverage. Attention should be paid to the period of coverage as well. If run-off cover is purchased, there may also be modifications to the terms of the policy to suit such extended coverage.
• D&O Insurance ordinarily covers financial losses suffered by a company and its directors and officers. The scope of loss covered may vary across the liability coverage sections selected for inclusion in the policy.
• Most critically, there will be a list of circumstances in which an insurer can refuse cover in respect of any claim. These are known as Examples include:
  • any deliberate or fraudulent act or omission or any wilful violation or breach of any law, regulation or by-law anywhere in the world on an insured person;
  • actual or alleged act or omission, including but not limited to any error, neglect or breach of duty in the provision of professional services to a third party;
  • trading or business debt incurred by a company;
  • fines and penalties assessed or levied against or imposed upon a company.

What this means for directors is that, subject to the exclusions and limitations in the policy, D&O Insurance will typically cover for defence and investigative costs and award of damages in the event of an allegation that they had breached their directors’ duties.

Takeaways

The insolvency moratorium is extended to Australian businesses experiencing financial distress resulting from COVID-19 and its dampening effect on the Australian economy. It provides a necessary element of certainty in the country’s road map towards a COVID-safe environment.

The amendments to the Act and Regulations neither suspend nor modify a director’s duties in statute and in common law. Despite the CERPO changes, a director is still required to discharge the full suite of their duties, or they run the risk of being held to task by stakeholders such as company shareholders and ASIC.

This year has been a challenge for business and directors alike. Although CERPO is expected to prop up the economy until the end of the year, the prevailing view is that it is unlikely to be extended for a second time. This should serve as an impetus for directors to make informed decisions about the management of their respective companies, and in a manner that satisfies their duties while making the most of the CERPO amendments to the insolvent trading and statutory demand regimes. At the same time, if there are doubts around whether you are discharging your director’s duties, ensure that you make informed decisions and obtain legal advice as appropriate so that you may rely on the applicable D&O Insurance if the need to do so arises.

If you are a director and believe that your company may be operating a ‘zombie business’, now is the time to confront reality and seek timely advice about a possible restructuring or winding up. Many options are available to a company that has a chance at recovery and renewal.

Queries

For more information please contact an author or any member of our  Restructuring, Turnaround & Insolvency team. 

Disclaimer 

This information and the contents of this publication, current as at the date of publication, is general in nature to offer assistance to Cornwalls’ clients, prospective clients and stakeholders, and is for reference purposes only. It does not constitute legal or financial advice. If you are concerned about any topic covered, we recommend that you seek your own specific legal and financial advice before taking any action.