Directors: ignore the 31 December deadline at your peril!
This article shares an important message for any director concerned about insolvent trading exposure. It is equally important to any advisor with clients in this scenario.
The advent of COVID-19 pandemic saw Australia’s insolvent trading laws relaxed in March this year. In essence, legislation was put in place suspending provisions that would otherwise hold directors to account for trading while insolvent. Initially these relaxed laws were to expire in September 2020, but recently that protection was extended until 31 December 2020.
Undoubtedly the legislation achieved what it had intended—It ensured directors did not feel pressured to prematurely appoint external administrators and close the doors through fear of insolvent trading exposure.
But as regularly is the case: the devil is in the detail.
Directors relying on this protection must appreciate the limitation of its application. Many people appear to be operating under the assumption that the March – December 2020 period provides some “blanket” shield from insolvent trading. Contrary to this view, the Australian Restructuring Insolvency & Turnaround Association (ARITA), the professional body for insolvency practitioners, stressed to its members last month that a company director who chooses to trade-on past the 31 December 2020 deadline has no retrospective insolvent trading protection.
That is, directors trading-on an insolvent business beyond 31 December 2020 will be exposed to the insolvent trading provisions throughout any period the company was insolvent—including the March-December 2020 period—should the company later end up in liquidation.
Under this guidance, directors must be made aware that they are only protected under these provisions if they appoint an external administrator to the company before the moratorium’s expiry, i.e. before 31 December 2020. The key take-home message being that any director of a company in financial distress should ensure they seek adequate and professional advice prior to the 31 December 2020 deadline.
ARITA outlined the following in respect of the legislation:
The specific amendment to the Corporation Act 2001 made as part of the Coronavirus Economic Response Package Omnibus Bill 2020 (and extended by the Corporations and Bankruptcy Legislation Amendment (Extending Temporary Relief for Financially Distressed Businesses and Individuals) Regulations 2020) is noted below [emphasis added]
588GAAA Safe harbour—temporary relief in response to the coronavirus
(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
(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.
It appears this interpretation of subpara 1(c) of s 588GAAA has taken many by surprise. TMA Australia as an example have recently commented that applying the legislation this way would, in their view, be contrary to the materials published by Treasury at the time the provisions were introduced – and they intend to seek clarity from Treasury.
We will certainly keep you advised of any developments in this space.
Given the stakes could be so high for many, what is clear is that directors and boards need to seek independent and professional advice on their situation without delay. Please contact your local Worrells partner if you have questions or are concerned about a client. We provide complimentary and no-obligation consultations and can give an assessment of the best solution for individual circumstances