A recent reform of Australia’s stringent insolvent trading laws has enabled a safe harbour from personal civil liability for directors who are taking a course of action to keep struggling businesses afloat.

Until now, there have been serious disincentives against directors working with struggling businesses, with directors facing personal liability and criminal or civil penalties if a company incurs a debt at a time of being or suspected of being insolvent. As a result, directors have been driven towards voluntary administration even when a business has the potential to be viable long term. Australia is known to have some of the harshest insolvency trading laws in the world, with good reason.

These changes mean that directors now have an opportunity to take reasonable steps to restructure and work with a struggling company rather than simply put it into voluntary administration.

Going forward, directors will only be liable for debts incurred when a company was insolvent if they were not developing or taking a course of action that was reasonably likely to lead to a better outcome for the business than proceeding to immediate administration or liquidation. Note that the legislation amendment is very clear about ‘hope’ not being a reasonable strategy. Directors are still required to stay informed about the welfare of the company.

Actions to lead to a better outcome that could be considered reasonable include:

• 1. Engaging professional support to assess the company’s solvency and provide timely information so you can make informed decisions
  2. Obtain professional advice on eligibility and viability of directors accessing the safe harbour provisions – the decision to utilise these should be made at board level
  3. Document a plan with realistic and measurable targets – make sure this plan shows why it is likely to lead to a better outcome
  4. Regularly assess the results of implementing the plan and amend as circumstances change
  5. At a point where it becomes obvious that the plan is not working or that the business won’t be able to rise from insolvency then work cooperatively with administrators or liquidators.

Can a company incur debts while insolvent?
The safe harbour provides protection for debts “incurred directly or indirectly in connection with” actions taken to turnaround the company. While hindsight may show that the path taken was incorrect, directors will be protected by safe harbour if they can show that the course of action was reasonably likely to lead to a better outcome at the time the decision was made. Directors are still liable where debts are incurred outside of actions taken to turnaround the company.

What are the warning signs of insolvency?
Companies of all sizes can become insolvent. Be very diligent in monitoring businesses experiencing fast growth. If employee payments, tax payments and tax reporting start to go awry, that is a strong indicator of underlying problems and should trigger your investigation as it will eventually trigger external investigation.

If a company needs help, get help. Hope is not a strategy.

If you have any questions about the solvency position of your company, we would be happy to discuss this with you. Call us on 03 5339 3200 or contact us here.

Thanks for reading.

By Genna Kidd

This article was originally published in the October issue of our client newsletter. Missed your copy? Contact us here to ask for it to be resent.

The information contained on this website has been provided as general advice only.  The contents have been prepared without taking account of your personal objectives, financial situation or needs.  You should, before you make any decision regarding any information, strategies or products mentioned on this website, consult your own financial advisor to consider whether that is appropriate having regard to your own objectives, financial situation and needs.