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Expiry of the 'Safe Harbour' provisions for Company Directors

By Bill Gambrill - 16 Sep 2020

As readers might recall, in early April 2020, at the height (and as part of) the initial response to COVID-19, the Government announced a number of temporary changes to the Companies Act 1993. The changes sought to address the position of companies facing liquidity issues.

The principal changes were to create a temporary 'safe harbour' regime, relieving directors from some director's duties should they decide to allow a company to continue to trade, and also the enactment of the Business Debt Hibernation Scheme. (We discussed these changes at the time the proposed legislation was announced and when it became law.)

The changes were only ever temporary; the legislation provided that the changes would be in effect for only limited periods of time (albeit that those periods could be extended by regulation). The first such period, namely the 'safe harbour' period, will end on 30 September 2020.

The initial indications are that very few businesses have entered Business Debt Hibernation. Furthermore, as the proper application of the safe harbour tests will only be determined in any cases brought against directors for breach of duty, it will be some time before we can assess what the effect of the changes has been.

The Ministry of Business, Innovation and Employment - which is the ministry responsible for administering the Companies Act - has recently issued a 'reminder' that the safe harbour provisions will expire on 30 September 2020. While the changes in COVID-19 response levels during August might have caused the Government to extend the 'safe harbour' period (and it could yet do so), as matters stand, there will be no extension; from 1 October 2020, directors' duties will be as they were before COVID-19.

One potential consequence is that the efficacy of the Business Debt Hibernation Scheme might prove to be more limited than envisaged: Business Debt Hibernation took effect alongside the temporary change to directors' duties; as was noted in submissions to the Parliamentary Select Committee, the reversion to more onerous directors' duties might discourage directors from attempting to salvage struggling companies if they face personal exposure should they be unable to do so.

Furthermore, while businesses might have been able to 'muddle through' the initial response to COVID-19 (during which government support has been available), the reversion to more onerous directors' duties will occur just as that government support is likely to diminish. While we do not know if the storm has passed (or if it has even arrived with full force yet), directors will have to be keenly aware of their obligations to the company (including any potential exposure to creditors) as their companies set sail on the open ocean.


Bill Gambrill


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