It is now well publicised that as part of the Coronavirus Economic Response Package Omnibus Act 2020 (Cth) directors will effectively be relieved from personal liability for insolvent trading if they can establish that a debt was incurred:

1. In the ordinary course of business
2. Over the period 25 March 2020 to 25 September 2020 (or such further period as prescribed by the regulations)
3. Before any appointment during that period of any administrator or liquidator

A couple of months in, and amid murmurings of calls to extend the period of relief, it is timely to reiterate that directors are still required to comply with their general duties including to exercise care and diligence, avoid conflicts, act in the best interest of the company and not improperly use their position for personal gain. In this regard, directors should also be aware that these director duties extend to having regard to the interests of creditors when a company is facing financial difficulties.

Further, and importantly, a director who acts dishonestly in incurring a debt whilst the company is insolvent (or which causes the company to become insolvent) will not be entitled to relief. That director will have committed an offence under section 588G(3) of the Corporations Act 2001 (Cth) and will be liable to a claim under section 588M by a subsequently appointed liquidator.

The obvious question arises: when will the conduct of a director in incurring a debt be dishonest?

Since amendments made in 2019, the Corporations Act has defined dishonest as “… dishonest according to the standards of ordinary people”.

Courts have been hesitant to create a determinative test for dishonesty, explaining that it is not their role to set standards of community morality that can change over time. Therefore, determining what is dishonest will always require a careful examination of all of the circumstances.

However, some guidance can be gleaned from case law in the context of directors’ duties more generally.

It is clear that merely knowingly incurring a debt while the company is insolvent will not, by itself, constitute dishonesty.

An oft repeated phrase is that dishonesty requires some form of moral turpitude. An example might be deliberately deceiving a creditor about the Company’s intention and ability to repay the debt being incurred, or about the purpose of the debt.

In considering criminal sanctions for breach of directors’ duties, courts have inferred dishonesty where a director has actively concealed a conflict of interest (Kwok v R (2007) 64 ACSR 307) and also where a director has made remuneration payments knowing the recipients had not done the work to justify those payments (Krecichwost v R (2012) 88 ACSR 339).

In that context, it seems unlikely that a director who causes the company to incur a debt in the current environment in the genuinely held belief that it is necessary for the company’s survival (e.g. essential wages) and with at least some confidence that the company can indeed survive will be found to have acted dishonestly. This is reinforced by the statement in the explanatory memorandum that debts incurred in “the ordinary course of business” extends to debts that are necessary to facilitate the continuation of business (for example, taking out a loan to move business online and pay employees).

If you have any queries or need any further details, please contact Wendy Jones on +61 8 8233 0645, or Alex Eyre on +61 8 8233 0688.