You are the director of a small company. You built it from the ground up, and until recently, it was a success.
Your debt is mounting, and the cash flow is drying up. You continue doing business, in the hope that the situation improves.
It doesn’t.
Insolvent trading is a serious incident that can have significant consequences for a director if handled improperly.
What is insolvent trading?
If a director continues to trade whilst the company is insolvent (unable to pay its debts when they become due and payable) they risk being held personally liable for the debt that is incurred (S 588G of the Corporations Act).
However, often, to cease all trade would not be in the best interest of the company and may only increase losses, restrict avenues for turnaround and diminish the final return to creditors.
This is where Safe Harbour provisions come into play.
What protection can Safe Harbour Provisions offer directors?
The Safe Harbour provisions (S 588GA of the Corporations Act) offer a crucial shield for directors facing these challenges and empowers them to pursue courses of action which have a reasonable chance of achieving a better outcome for the company, rather than an immediate liquidation.
For effective Safe Harbour, it is crucial that a director pursues this course of action as soon as they suspect the company has become (or may become) insolvent.
There are many relevant considerations when claiming Safe Harbour. Some of these include:
- How informed the director is about the company’s financial position;
- Whether the director obtained professional and independent advice;
- Whether the director kept proper financial records;
- Whether the director developed and implemented a restructuring plan; and
- Whether the director has paid the employee entitlements, fulfilled tax obligations and complied with reporting requirements.
Your key takeaways
- Early intervention is crucial. The longer a company endures financial distress and takes on more debt, the greater the personal risk to directors.
- Compliance is critical. A failure to keep adequate records and fulfil legal obligations can render this defence unavailable.
- Consult with a restructuring practitioner who has experience in these matters. They understand the legal implications of s 588G and can guide you towards commercially viable turnaround.
Life doesn’t end after a company is rendered insolvent.
