Insolvent Trading Pre and Post COVID-19

Insolvent Trading Pre and Post COVID-19

As most readers are aware, the Government has made changes to the law including with respect to insolvent trading for the period of the coronavirus pandemic. Our previous article addresses these temporary law changes (found here).

Insolvent Trading

A Director has the duty to not trade whilst insolvent – Section 588G of the Corporations Act 2001

'Solvency' is defined in Section 95A (1) of the Corporations Act 2001 as the ability to pay all debts as and when they become due and payable.

A person or organisation who is not solvent is 'insolvent' (Section 95A(2)) of the Corporations Act 2001.

Consequence for Insolvent Trading

Under Section 588G of the Corporations Act 2001, Director(s) may face civil and criminal consequences if found to have breached the Act including:

• Fine for up $200,000;
• Compensation proceedings
• Criminal charges
  • Fine for up $20,000; and/or
  • Imprisonment for up to five years

Temporary Safe Harbour

The Coronavirus Economic Response Package Omnibus Act 2020 amongst other things, introduced a safe harbour granting temporary relief for financially distressed businesses: Section 588GAAA into the Corporations Act 2001. The temporary safe harbour provides relief for directors from potential personal liability for insolvent trading.

Under Section 588GAA of the Corporations Act 2001, a director wishing to rely on the temporary safe harbour measure “bears an evidential burden” to prove that the requirements of the temporary safe harbour provisions are met.

What does this mean to you:

Under Section 588GAAA of the Corporations Act 2001 to be able to rely on temporary relief measure for insolvent trading, the debt incurred must be incurred:

• in the ordinary course of the company’s business;
• during
  • the six-month period commencing from 24 March 2020; or
  • longer period as prescribed by the regulations
• before any appointment of an administrator or liquidator during the temporary safe harbour application period

Accordingly, if a company was insolvent prior 25 March 2020 the director cannot rely on the temporary safe harbour measures.

You should seek advice early from a suitably qualified and independent advisor about the company’s financial affairs such as your accountant and solicitor.

How can we help

Should you wish to discuss your circumstances, please call Abdul Chambal on 0402 763 883, Bill Cotter on 0413 885 888 or Roland Robson on 0412 982 859.