Insolvent Trading Legislation
Under the Federal Corporations Act 2001, a director of a company may be held personally liable for debts incurred by a company whilst it is insolvent. Broadly, under section 588G if the Corporations Act, a director will be found to be in breach of their duty if they:
- Were a director at the relevant time;
- The company was actually insolvent;
- The company incurred a debt; and
- There were reasonable grounds for the director to expect insolvency.
There are significant penalties that apply to directors found to be in breach.
The safe harbour provision operates to protect directors who recognise the financial problems of their company and incur debts in an attempt to turnaround the financial status of the business to avoid formal insolvency proceedings.
The Safe Harbour Provision
Under section 588GA(1) of the Corporations Act, the safe harbour provision provides that the duty to prevent insolvent trading will not apply if:
- At a particular time after the director expects insolvency, the director develops a course of action that is reasonably likely to lead to a better outcome for the company; and
- The company debt is incurred in connection with the course of action.
The key test to be considered is whether the course of action may be ‘reasonably likely to lead to a better outcome for the company’.
To invoke the safe harbour provision, the Director and Board also should do the following pursuant to section 588GA(2) of the Corporations Act:
- Inform themselves about the company’s financial position;
- Take steps to prevent misconduct by officers and employees;
- Keep appropriate books and records;
- Obtain advice from an ‘appropriately qualified entity’; and
- Develop or implement a plan for restructuring the company.
It is important to note the safe harbour provision is not a defence, but must be considered by liquidators before they undertake a claim for insolvent trading.
However, sections 588GA(4) and (5) of the Corporations Act state the provision cannot be invoked if the company is not lodging tax returns or paying employee entitlements, and not cooperating with the liquidator.
A solicitor can assist you to develop a plan for restructuring the company to assist in satisfying the elements of the safe harbour provision. If you would like advice from our experienced lawyers about corporate matters, contact us today.
DISCLAIMER: The information contained in this article is general and is not intended to be advice on any matter. It is for information only and is not legal advice. In the event of a legal problem, you should seek legal advice.