A company is insolvent if it is unable to pay amounts that it owes to creditors when they become due and payable. There are various relevant in determining when a company is insolvent, some of which are set out here.
However the Federal Government has made changes to the law relating to insolvent trading for the period of the coronavirus pandemic.
What is insolvent trading
A Liquidator can pursue a claim for insolvent trading against a director of a company, if:
- The person was a director of the company at the time when it was insolvent;
- During the period which it was insolvent the company incurred debts which have not been paid; and
- At the relevant time, the director had reasonable grounds for suspecting that the company was insolvent, or a reasonable person in the director’s position would have had reasonable grounds for so suspecting.
The amount of an insolvent trading claim which a Liquidator can pursue against a director is the total of the unpaid debts incurred by a company whilst it was insolvent.
What has changed because of coronavirus?
To make sure that companies have confidence to continue to trade through the coronavirus health crisis with the aim of returning to viability when the crisis has passed, the Federal Government has introduced amendments to the insolvent trading provisions. Under these amendments, directors will be temporarily relieved of their duty to prevent insolvent trading with respect to any debts incurred in the ordinary course of the company’s business. This will relieve the director of personal liability that would otherwise be associated with the insolvent trading. However, the amendments will only apply for six months, being until September or early October 2020.
However, insolvent trading where there have been egregious cases of dishonesty and fraud will still be subject to criminal penalties.
The Federal Government has provided the following example of how the insolvent trading amendments will apply:
Steph, Mon and David own a small company that operates a chain of yoga studios in Sydney. Social distancing measures require the participants in the yoga class to be significantly reduced. As a result, their company incurs more debt, to the point where it cannot meet its debts as and when they become due and payable. Under the provisions of the Corporations Act, the three owners would be personally liable if the business took on further debt without entering an insolvency procedure like voluntary administration or liquidation. However, during the six-month period in which the temporary relief is offered, their business can continue to open their yoga studios so that they can maintain their customers and quickly resume normal operations when the crisis has passed, and continue to incur debt. When economic conditions improve, the company can pay back the debt incurred.
How can we help?
If your company is insolvent and you intend to take advantage of the changes to insolvent trading laws, we can help. We have been helping businesses with negotiating payment arrangements and settlements with trade creditors, negotiating rent reductions with landlords and implementing strategies to reduce costs so when things bounce back so will the business. So, get in contact with us for a free no obligation discussion.