In brief - the Federal Government has announced a relaxation of some of the laws relating to insolvent trading.
The laws in Australia generally impose very strict obligations upon directors when a company is facing financial uncertainty. In recent years legislative reform and courts have imposed on directors greater personal responsibility for the obligations of companies. Directors have a legal obligation to prevent a company trading whilst insolvent. In response to the COVID-19 pandemic however, the Federal Government has announced a relaxation of some of the laws relating to insolvent trading. There are already provisions within the Corporations Act 2001 (Cth) that assist directors to manage difficult circumstances by appointing qualified advisors under the statutory safe harbour regime. The amendment once passed may make the process of corporate rescue more accessible. For both commercial and legal reasons a director needs to ensure a clear business plan in advance as far as possible and to seek qualified advice to decide on the best options.
What are the legal obligations for Directors?
Under Australian law, a director has a duty to not allow a company to incur a debt without reasonable grounds to expect that the company can pay the debt. Trading whilst insolvent can result in significant personal liabilities to directors. Most directors' and officers' insurance policies will not cover claims for insolvent trading.
Additionally there are potentially fairly severe penalties for directors if companies fail to pay tax obligations in a timely manner.
Insolvent trading laws to be relaxed for six months
The Federal Government has announced that it will legislate to remove the risk of a director having personal liability for the debt incurred in the "ordinary course of the company's business". This law will be relaxed for six months.
The question of what is in the ordinary course of a company's business is not expressly defined, but it is a term that the courts have often considered in various contexts.
The director will bear the "evidential burden" of showing the exemption applies to her or him if challenged.
The amendments do not reduce the general legal obligations upon directors to act in the best interests of the company and its stakeholders. Directors still have legal obligations to the company and to their creditors.
The relaxation of insolvent trading laws, combined with the existing safe harbour regime should assist directors of fundamentally sound businesses work through the current difficult market circumstances.
A whole of business approach
There is an opportunity for business owners to plan and get ahead of the game in these difficult market conditions. A clear plan to position the company to continue its business and deliver the best outcome for all stakeholders, including creditors, with the benefit of advice from an experience restructuring professional, may be the deciding factor between preserving a business, or winding it up.
This is commentary published by Colin Biggers & Paisley for general information purposes only. This should not be relied on as specific advice. You should seek your own legal and other advice for any question, or for any specific situation or proposal, before making any final decision. The content also is subject to change. A person listed may not be admitted as a lawyer in all States and Territories. © Colin Biggers & Paisley, Australia 2020.