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Temporary Relief for Directors Personal Liability for Trading Whilst Insolvent

07/10/2020 by Bruce Gleeson

Readers may possibly recall that the Federal Government announced a raft of temporary relief measures in late March 2020, some of which were aimed at giving directors of companies’ confidence to trade through Covid-19.

One such important measure was that directors would 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. As such, this served to relieve the director of personal liability that would otherwise be associated with insolvent trading. The initial relief period was 6 months. In late September 2020 this relief period was further extended until 31 December 2020.

What does not appear to be well understood is exactly how such temporary relief has been enacted in legislation and in a practical sense, what steps directors need to consider to obtain the benefit of such protective relief.    

Recently, the Australian Restructuring Insolvency & Turnaround Association (ARITA) has released important details concerning the application of the COVID-19 temporary insolvent trading protection measures.

What does this mean for directors?

The protection for directors only applies if they commence an external administration (such as Voluntary Administration or Voluntary Liquidation) on or before 31 December 2020. There is no retrospective protection measure if a director enters external administration after 31 December 2020

Time it is ticking – act now if you are unsure

With less than 12 weeks before 31 December 2020 it is important that directors seek advice as soon as possible from a qualified insolvency and restructuring professional if they are currently in financial distress. Directors need to allow sufficient time to be able to get timely advice and properly consider it and what it means for them. So, don’t leave it too late. Get in contact with us and we will help navigate you through the maze.

For those interested in the legislation …..

The specific amendment to the Corporation Act 2001 was made as part of the Coronavirus Economic Response Package Omnibus Bill 2020 (and extended by the Corporations and Bankruptcy Legislation Amendment (Extending Temporary Relief for Financially Distressed Businesses and Individuals) Regulations 2020).

588GAAA  Safe harbour—temporary relief in response to the coronavirus

(1)  Subsection 588G(2) does not apply in relation to a person and a debt incurred by a company if the debt is incurred:

(a) the ordinary course of the company’s business; and
(b) during;
(i) the 6-month period starting on the day this section commences; or
(ii) any longer period that starts on the day this section commences and that is

prescribed by the regulations for the purposes of this subparagraph; and
 (c) before any appointment during that period of an administrator, or liquidator, of   the company.”

What about advisors? How can we help you?

You need to be mindful of this legislative relief and the limitation described herein and actively encourage clients if they are in financial distress to seek advice as soon as possible and in any event before 31 December 2020.

With much of the stimulus that was initially announced beginning to taper off, advisors still need to actively assist many clients navigating the difficult period ahead. We are here to partner with you and help develop a tailored strategy.

We are also are deeply knowledgeable on the recent Small Business Insolvency Reforms announced and due to start on 1 January 2021.

Also remember personal liability for GST also commenced from 1 April 2020 as well.

Jones Partners are only a phone call, email, zoom meeting or face-to-face meeting away. Let us help you by showing there is light at the end of the tunnel.