Do you need to be wary of 1 January 2021?
Directors at risk
If you’re a Director whose company is drowning in debt but are hoping to battle on past the end of the Coronovirus-19 crisis, or you’ve been keeping the company afloat just because of the Federal government JobKeeper and other support payments (we’re hearing these businesses called ‘zombie companies’), then you need to know that 31 December 2020 is the last day that the Government’s temporary relief allows exemption from personal liability for insolvent trading.
Temporary relief
Normally, by s588G(2) of the Corporations Act 2001 a director that allows the company to incur debt whilst (even technically) insolvent becomes personally liable for the debt and may commit an offense. But because of the Coronavirus crisis, the Federal Government intervened in March 2020 to exempt Directors from this liability by extending temporary relief to “financially distressed businesses” until the end of December 2020 (the Coronavirus Economic Response Package Omnibus Bill 2020 and related legislation or regulation)
The Risk
The problem now is that the big Liquidator firms are all warning that they intend to interpret the wording of the exemptions given to Directors narrowly, so that any director who allows a “zombie” company to trade past 31 December 2020 loses the protection of the temporary relief for the entire period. This means that the temporary protection falls away and the Director who battled on is at again at risk for that whole period. This is because s588GAAA(1)(c) provides that s588G(2) does not apply “before any appointment during that period of an administrator, or liquidator, of the company”. It does not give protection after that period ends.
The Remedy – s588GA safe Harbor
If you’re in the position of continuing to trade while insolvent, incurring credit while not able to pay current debts when due, or at risk of defaulting in tax and especially in employee entitlement, then you need to take steps before the end of 2020.
The obvious solution is to update your “safe harbor” plan. By s588GA a Director is entitled to a limited “safe harbour” if the director can show that the company’s written plan will result in a better outcome than immediately appointing an Administrator or Liquidator, but the onus is on the Director so it needs to be realistic.
The alternative to an objectively reasonable recovery plan, sadly, is that the prudent Director might have no alternative but to appoint an Administrator before 31 December 2020.
Either way, if you need someone on your side to talk through your options and support you in making difficult decisions, give us a call. We’re here to help.
Disclaimer: as always, these remarks are general observations, not legal advice, so you should not act on this without taking proper advice tailored to your circumstances.
