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Safe Harbour – Protecting Directors through Covid-19

Commercial Law

What is the Safe Harbour Regime?

Company directors should be aware of the safe harbour regime which was introduced in 2016.  The aim was to protect directors making decisions at times of financial difficulty for their company.  The regime provided protection for directors if a director allows the company to incur a debt that was reasonably likely to lead to a better outcome for the company and its creditors rather than going into voluntary administration or liquidation.  Thus, directors could utilise that protection as a defence if a liquidator sought to pursue a claim against the directors for insolvent trading.

That regime does not preclude the requirement for directors to consider risk exposure in their general obligations to the company, and it is important for any business taking on debt to have a clear and viable plan that will address and facilitate the continuation of the business.

What are the Covid-19 changes to the Safe Harbour Regime?

Temporary extensions have been made to the regime for Covid-19.  Directors are now given protection for:

  • debts which are reasonably likely to lead to a better outcome for the company and its creditors, and
  • debts the company incurs in the ordinary course of business from 25 March 2020 until 25 September 2020.

Note that the extended safe harbour provision requires that:

  • the debt must be incurred by the company in that six-month period,
  • the debt must be incurred before any appointment of an administrator or liquidator, and
  • the debt must be necessary to facilitate the continuation of the business.

Thus, debts incurred in the business’s ordinary course of operation, such as to pay wages, or implement online strategies for businesses unable to operate in their traditional manner may meet the criteria.  Directors making decisions while the business is in financial distress may be protected by these safe harbour extensions, which reduce the risk of exposure to personal liability for a claim of insolvent trading.  We suggest that such director should ensure that the business has a clear and viable plan, and appropriate record keeping as to why decisions were made so as to enable the directors to provide evidence should they need to use the safe harbour protection.

So, have my duties as director changed because of Covid-19?

No, the duties of directors have not changed; however, there is for a short period, potential protection against a claim of insolvent trading provided that you have continued to act with care, diligence and good faith.  That protection is still subject to the usual director’s duty to act in the best interests of the company including in the interests of the shareholders.

The existing safe harbour regime will continue after 25 September 2020, but the temporary extension designed to help companies continue trading through the pandemic will finish.  However, should a claim be made in regard to decisions made during the temporary extension, directors will be able to rely on those protections even if the claim is brought after the extension period ends.

Please don’t hesitate to contact any member of our commercial team for further assistance on the roles of directors generally, and during the pandemic.