Consider your options before insolvent trading protection expires on 31 December 2020
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As part of the relief package that the Federal Government introduced in March 2020 to mitigate the impact of COVID-19 pandemic, existing insolvent trading provisions were suspended to prevent directors from prematurely closing the door and appointing external administrators in fear of insolvent trading exposure. Initially due to expire in September 2020, this temporary Safe Harbour protection was subsequently extended to 31 December 2020.
Along with other changes to Australia’s corporate insolvency laws, such as lifting the threshold amount required to issue a statutory demand from $2,000 to $20,000 and extending the timeframe to respond to statutory demand from 21 days to 6 months, these measures proved highly successful in encouraging directors to trade on their businesses.. This is demonstrated by an almost 50% decline in the number of corporate insolvency appointments since March 2020 compared to the same period last year.
However, directors seeking to avail to themselves of the temporary relief from insolvent trading must be aware of its limitations. Contrary to popular misapprehension, this “moratorium” does not provide an automatic and blanket shield that protects directors from being held personally liable for debt incurred whilst insolvent during March to December 2020.
The Australian Restructuring Insolvency & Turnaround Association (ARITA), the professional body for insolvency practitioners, has provided the following guidance with respect to the specific amendment made to the Corporations Act 2001 (for details of the legislation, see below):
- Relief from insolvent trading is only applicable where an administrator or liquidator was appointed before 31 December 2020; and
- a director who trades on an insolvent company beyond the 31 December 2020 deadline has no retrospective protection. This means that should the company subsequently enter liquidation, the director will be exposed to the insolvent trading claims in relation to any period the company was insolvent, including the March-December 2020 period.
While the above is subject to the interpretation by the Courts, directors should act now to examine the financial position of their business and determine whether the business can reasonably be expected to meet its debts as and when they fall due. If directors are not confident about the solvency of their business then professional advice should be obtained immediately and, if necessary, the company may appoint an administrator or a liquidator on or before 31 December 2020, so that directors are eligible for the COVID-19 Safe Harbour protection and avoid potential personal liability for debts incurred during the March-December 2020 period.
It should further be noted that the relief from insolvent trading may be extended for up to three months under the Federal Government’s recently proposed reform to insolvent laws. The announcement to introduce a “debtor-in-possession” restructuring process for small businesses included a transitional declaration mechanism available until 31 March 2021.
This would allow an eligible small business unable to immediately engage a qualified Small Business Restructuring Practitioner to make a declaration of its intention to access the process, published through the ASIC insolvency notices website. Following the declaration, the business would enjoy the current protection from insolvent trading for a maximum of three months until they are able to engage an insolvency practitioner.
The team at Collins Wentworth are experienced in business financial matters. If you have concerns about the financial position of your business and wish to know more about how we can assist you, contact us today.
CORPORATIONS ACT 2001 – SECT 588GAAA
Safe harbour–temporary relief in response to the coronavirus
Safe harbour
(1) Subsection 588G(2) does not apply in relation to a person and a debt incurred by a company if the debt is incurred:
- (a) in the ordinary course of the company’s business; and
- (b) during;
- (i) the 6-month period starting on the day this section commences; or
- (ii) any longer period that starts on the day this section commences and that is prescribed by the regulations for the purposes of this subparagraph; and
- (c) before any appointment during that period of an administrator, or liquidator, of the company.
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