By Ellen Ferris, a Solicitor in Matthews Folbigg’s Insolvency, Restructuring and Debt Recovery Group
In the current climate, many accountants may have clients experiencing financial distress, including directors seeking advice on how to avoid personal liability for trading whilst insolvent.
What advice should accountants be giving their clients in this environment? What advice do directors need to hear?
Insolvent Trading – The Danger
Firstly, it is important to understand how the law defines insolvent trading. The law defines insolvency as an inability to meet debts as and when they are due and payable. Insolvent trading, in simple terms, relates to debts incurred whilst a company is insolvent.
Secondly, however, determining insolvency at any point in time is a very complex assessment. It does not include a temporary shortage of liquidity, but looks at the company’s assets as a whole and its cash-flow. In the current COVID-19 climate, many businesses will be experiencing temporary liquidity problems, however the questions is whether these are going to lead to longer term shortages of capital. Given what is going on in the world, who knows?
Thirdly, the risk is that during a period of uncertainty a company continues to trade and incur debts to keep the doors open. However with the benefit of hindsight, it may become apparent that these debts are unable to be paid. Directors are right to be concerned that they may be personally liable for debts incurred during this period.
The (Partial) Solutions
There are 3 possible sources of assistance for directors:
- Statutory defences – this will be the subject of a separate blog;
- Safe Harbour provisions – fairly recent amendments allow some limited assistance for directors in troubled waters. Again, we will explore these separately
- Safe Harbour 2 – COVID-19 edition. That’s the focus of the current blog.
On 23 March 2020 the Federal Government passed legislation providing 6 months temporary relief for directors from personal liability for trading while insolvent. These changes will impact what directors can do – and also the way accountants advise their clients, and what options should be considered by accountants and their clients.
A copy of the amendments can be accessed here.
The effect of these amendments is that a director will not be personally liable for debts incurred during the next 6 months (commencing on 24 March 2020) provided that the debt is incurred in the ordinary course of the company’s business and during the 6 month period starting on the day of the commencement of the new section. Unlike the existing safe harbour provision, this section does not require compliance with tax or employee entitlement obligations for the protection to be triggered. The evidential burden, however, is still on the director seeking to rely on this section, and it is therefore important that the relevant books and records of the company are maintained.
The Australian Restructuring Insolvency & Turnaround Association (“ARITA) has published a useful guide for accountants advising directors during these difficult times which can be accessed here.
All of the solicitors on our Insolvency, Restructuring & Debt Recovery Team are members of ARITA and are experts in assisting in financial distress. Please feel free to look at our other COVID—19 resources on our dedicated section of our website here, or our general Insolvency and Restructuring page here,
Or contact a Principal of Matthews Folbigg Insolvency, Restructuring & Debt Recovery Team:
Jeffrey Brown on (02) 9806 7446 or jeffreyb@matthewsfolbigg.com.au
Stephen Mullette on (02) 9806 7459 or stephenm@matthewsfolbigg.com.au.
