The Explanatory Memorandum to the Economic Response Act (Explanatory Memorandum) states that a debt is incurred in the ordinary course of business if it necessary to facilitate the continuation of the business during the six-month period commencing on the Effective Date. This provides a narrower protection than that included in the existing safe harbour regime (which provides protection for debts incurred directly or indirectly with a course of action likely to lead to a better outcome for the company). The examples given as to what "debts incurred in the ordinary course of business" are:

Care will need to be taken by directors to ensure a debt incurred is in the ordinary course of business. It would appear from the example given in the Explanatory Memorandum (of a loan to move business online), that the expression "ordinary course of business" is intended to be widely interpreted, to facilitate transactions with a view to saving the business, but this is an area of potential uncertainty. For example, would a debt incurred as part of a rescue financing be considered to be incurred in the ordinary course of business?

Due to this uncertainty, the existing safe harbour regime may continue to have some ongoing relevance as companies respond to the financial challenges posed by COVID-19. That is, although the debt incurred as part of the rescue financing might not be in the ordinary course of business, it may comfortably fall within the existing safe harbour protection (assuming that the other criteria are satisfied). Directors may therefore seek to rely on both safe harbour regimes during the next six months to obtain protection under both regimes for debts incurred where there might be ambiguity.

In any event, it can be expected that distressed companies should and would seek to pursue the core requirement of safe harbour: to develop and take a course a course of action reasonably likely to lead to a better outcome than administration or liquidation where that is practically achievable. In addition, the factors that may be taken into account under the existing safe harbour regime (for example, ensuring directors are receiving proper information and keeping appropriate financial records, are properly advised and are developing a plan for restructuring the company to improve its financial position) are good practice and helpful for discharging the directors' general duties to the company.

Creditors and counterparties to transactions with stressed companies should be aware of the heightened voidable transaction risk (in particular the risk of payments received by creditors subsequently being set aside as preferences) if those companies are insolvent (that is, unable to pay their debts) but are continuing to trade in reliance on these reforms. This could cause counterparties to more frequently require upfront payment, rather than extending customary credit terms.

Further, it appears the Economic Response Act contemplates the use of regulations to restrict certain circumstances in which a director may not be able to rely on the temporary safe harbour relief. It is unclear what those circumstances are, and there are no draft regulations yet available. This provides some uncertainty for directors, though if the amendments are to have the desired effect then presumably any exceptions will be reasonably narrow and targeted.

As with the current safe harbour regime, the protections do not extend to protection from the criminal penalties associated with insolvent trading that is dishonest.