By Andrew Hack, Solicitor, and Stephen Mullette, Principal, of Matthews Folbigg Lawyers, in our Insolvency, Restructuring and Debt Recovery Group.
Justifiably, many companies will be concerned about the current and future impact COVID-19 will have on their ability to pay debts and wages. Australia has strict duties on company directors to ensure companies do not continue to trade whilst insolvent. The duty applies in circumstances where there are reasonable grounds for suspecting the company is or would become insolvent and the director does not prevent the company from incurring further debt. Directors may become liable for the debts incurred as of the date the company became insolvent. Civil penalties can also apply.
Seemingly, given the breadth of discussions in the media regarding the impact of COVID-19, it may be difficult for directors of financially troubled companies to argue there were not reasonable grounds to suspect insolvency.
However, the Australian Government has passed legislation to include temporary relief for directors’ personal liability for insolvent trading. The proposed bill introduces a new safe harbour regime in response to the coronavirus, where a debt is incurred ‘in the ordinary course of business’.
This will not help those involved in illegal phoenixing activity. Recent amendments to the Corporations Act 2001 (Cth) (“the Corporations Act”) place strict duties on company officers to prevent “creditor-defeating dispositions” of company property prior to the company being placed into external administration. Breaching this duty can result in hefty fines, significant compensation orders and even gaol time. Directors should be aware that the coronavirus safe harbour from insolvent trading liability, as proposed in the Australian Government’s new bill, does not apply to creditor-defeating dispositions.
In our next article we discuss the steps directors should take in circumstances where they believe the company is, or is likely to become insolvent, in order for them to avoid or limit their risk of exposure to personal liabilities.
If you would like more information or advice in relation to insolvency, restructuring or debt recovery law, contact Andrew Hack at firstname.lastname@example.org or a Principal of the Matthews Folbigg Insolvency, Restructuring & Debt Recovery Group:
Jeffrey Brown on (02) 9806 7446 or email@example.com
Stephen Mullette on (02) 9806 7459 or firstname.lastname@example.org.