Regulatory changes to protect directors during COVID-19

AICD head of advocacy, Louise Petschler, examines the rapid changes in corporate regulations triggered by COVID-19.

COVID-19 disruption demands innovative and creative regulatory settings. Already, big-ticket policy calls reflect the gravity and scale of the COVID-19 impact. Unprecedented public health measures to contain the spread of the virus, a rapidly expanding safety net that still cannot meet community need, a huge wage subsidy program to keep as many Australian employees “on the books” as possible are just some examples. These are once unthinkable measures that will grow over the months ahead. Clearly, “business as usual” (BAU) approaches will not cut it during this crisis.

The same urgency is needed to suspend, relieve and remake corporate and governance law to meet the demands of this new environment. Positively, we have seen early and decisive action on important fronts: relieving directors of their personal liability for insolvent trading, powers to allow “virtual” AGMs, and key regulators ASIC and APRA refocusing priorities on challenges from the pandemic. Many more urgent regulatory reforms are needed to support public health objectives and to accommodate a virtual and disrupted operating environment.

The focus of the AICD Advocacy team is on supporting our members and the director community as they navigate the many challenges presented by the unfolding health and economic crisis. The issues are multiple and serious — from employee safety and wellbeing to acute solvency and liquidity challenges, and longer-term operational and market disruption.

The AICD has engaged early with governments and regulators, calling for:

• Bold and innovative support packages, including wage subsidies and collaboration between government, business and community organisations to deal with the crisis.
• All levels of government to pause BAU regulatory processes, where possible, suspend current or impending compliance obligations not critical to public or community safety, extend reporting and related timeframes, and waive regulatory fees and penalties.
• Urgent relief on crisis hot spots such as insolvency, virtual AGMs, securities class actions safe harbour and temporary relief across procedural, reporting and constitutional challenges.
• Targeted support and regulatory certainty for not-for-profits and charities.

As Treasury has acknowledged, “Companies are needing to make very quick decisions in the context of very uncertain trading conditions. To encourage business to make the hard decisions, it is important that the government can provide regulatory certainty, and provide it as quickly as possible.”

At the time of writing, the AICD is raising further urgent relief and adjustment matters (some of which are discussed below), and flagging upcoming challenges in financial reporting and directors’ duties. We welcome member input on emerging or current regulatory challenges to our policy team.

COVID-19 temporary insolvency liability relief

The government has provided a six-month temporary relief for directors from personal liability for trading while insolvent. This decisive step, at a time when many directors may feel compelled by Australia’s insolvency settings to place their company into voluntary administration, is to be applauded. Directors will be able to rely on the temporary relief in relation to a debt incurred by the company if the debt is incurred in the “ordinary course of the company’s business” in the next six months.

Importantly, the changes do not relieve directors from core duties such as the obligation to act in the best interests of the corporation — including, when approaching insolvency, the interests of creditors — and with care and diligence. Directors should continue to mitigate the risks of falling into insolvency by taking reasonable steps to inform themselves about current and ongoing viability.

The Australian Charities and Not-for-profits Commission (ACNC) has announced that the temporary safe harbour also extends to charities. While we welcome this announcement, the ACNC is requiring a charity to inform its members and the ACNC if it is trading insolvent. This is not required of companies and we are seeking clarity from the ACNC for why this obligation applies. We are also asking states and territories to apply the same safe harbour applies to committee members of incorporated associations.

COVID-19 securities class actions

The AICD is calling for an urgent temporary safe harbour on securities class actions for disclosures relating to COVID-19 disruption. Market volatility and ongoing uncertainty pose extreme challenges for boards and listed companies required to comply with continuous disclosure and misleading and deceptive conduct laws that are among the strictest in the world. We argue companies should be temporarily relieved of the risk of securities class actions being launched for disclosures relating to the uncertain COVID-19 environment. We have recommended a model the Treasurer could introduce under the new emergency powers.

Concern among listed directors about the potential risks of speculative actions is high. This is an unnecessary distraction at a time when board and organisational resources must be focused on adapting and responding to the impacts of COVID-19 on organisations. While the ASX has encouraged entities to review their guidance in light of COVID-19 and to either update it if not current or withdraw it, we are concerned this is only a short-term fix, and one that could create a longer-term information vacuum. The AICD is discussing our proposal with parliamentarians, regulators and stakeholders.

Support package for NFPs

It is clear that it will be difficult for many NFPs to financially withstand the impact of COVID-19 without substantial support. The AICD has written to federal, state and territory governments seeking: accelerated and additional funding; support for access to credit; extension of all business support measures to NFPs; relief from tax liabilities, government charges and fees; and further concessions for charitable donations.

Virtual and deferred AGMs

ASIC will take no action if upcoming AGMs are postponed for two months (until 31 July), and will support the use of appropriate technology to hold hybrid or virtual AGMs where permitted under a company’s constitution and provided shareholders are afforded reasonable opportunity to participate. The ACNC has adopted a similar stance for charities.

These are pragmatic measures that will provide some relief to companies in the short term. However, legislative relief using the Treasurer’s powers is needed to provide certainty on running virtual AGMs and to remove risk of third-party actions.

Financial reporting and lodgement

The AICD strongly welcomes the commitment of ASIC and APRA (and the Council of Financial Regulators) to suspend BAU regulatory work until September, and focus on COVID-19 challenges and responses. We are calling for similar approaches across all regulators, including the Australian Taxation Office.

We are also yet to see the adoption of broader extensions on regulatory and corporate reporting, and guidance on challenges in financial reporting, evident in other jurisdictions. The challenges of going concern assessments, audit and assurance in this environment will be considerable for all boards, and guidance, regulatory certainty and consideration of safe harbours for directors disclosing information relevant to solvency and going concern is needed.

Looking ahead

The scale and impact of the COVID-19 crisis will continue to present challenges to organisations across Australia. It will demand further innovative and decisive steps by governments to mitigate the impacts, and by organisations and boards in every sector to work through the crisis and plan for recovery — which will come.

From these uncertain times, there will be fresh clarity on the role and purpose of the corporation and the role of business in society. In the months ahead, there will be an opportunity to test and confirm regulatory fundamentals as we move out of the crisis period. For now, urgent action on critical regulatory items is the AICD’s focus — to support boards and organisations as they deal with the impact of the pandemic on their people, their communities and their operations.

Stay up to date on the latest regulatory developments via the AICD COVID-19 portal here.