Insolvent trading and a director’s liability for company debts

A proposed amendment to the Corporations Act 2001 (Cth) should now encourage all qualified advisers i.e. accountants and solicitors, to be proactive in reviewing their client’s ability to deal with corporate and personal insolvency.

The amendments are:

  1. what has become known as the safe harbour regime/defence for company directors, to avoid personal liability for insolvent trading that may arise once a company has been placed into liquidation (proposed section 588GA Corporations Act), which is awaiting official approval to commence; and
  2. a stay on contracts being terminated as a result of an insolvency event (ipso facto clauses) during the administration of a company, which will take effect on 1 January 2018. The stay will not apply once a company is placed into liquidation.

Company directors will avoid personal liability for company debts if the director takes a course of action which will lead to a better outcome for the company and its creditors, as opposed to entering into administration / liquidation.  The better outcome is based on an objective test, not the subjective opinion of the director.

That course of action will include maintaining appropriate financial records, obtaining advice from a qualified adviser i.e. an accountant and/or solicitor or developing a plan for financial re-restructure, which may include formal insolvency.

Company liabilities to employees (superannuation) and taxation reporting obligations must still be kept up to date.

Accountants should now prepare/update their checklists to send to clients, setting out the course of action directors can take to be pro-active when dealing with potential  insolvency, and resulting personal liability for company debts.

Please contact SRM Lawyers to answer any queries you have relating to corporate or personal insolvency.

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