Page 54 - Print21 Nov-Dec 2020

Legal Issues
Insolvency responsibilities
Print21 resident legal eagle Wal Abramowicz says print business directors need to be aware of the Covid insolvency dates, the ending of safe harbour laws, their own responsibilities, and the repercussions of trading while insolvent, which includes personal liability.
course of business between 23 March 2020 and 31 December 2020.
The phrase ‘in the ordinary course of business’ is broad. It includes the day-to-day buying and selling of products and services. It also covers one-off decisions as to the structure and development of the business. For example, taking out a business loan in order to open an online store which will be more resilient under lockdown restrictions. This may be
a deviation from previous decisions, but still represents the ordinary course of business for the company.
This allows directors the freedom to attempt to trade out of a temporary insolvent period brought about by the pandemic. Businesses which are otherwise sound and successful can therefore survive temporary setbacks. They should then be in a position to pay off their outstanding debts once normal trading resumes.
However, 31 December 2020 is now not far away. Although the current protections will last until that date, on the following day any director whose company is trading insolvent will become personally liable. It is also important to note that general directors’ duties still apply. This includes the duty to maintain books and records. In particular it would be prudent to ensure that records demonstrating that a company was solvent as at
31 December 2020 are prepared. Professional advice should be sought at the earliest opportunity in order to ensure that the company is compliant with any requirements
of the safe harbour regime. If the company is unlikely to be solvent then steps should be taken to place it into administration or liquidation prior to the expiration of the safe harbour protection.
Wal Abramowicz is managing director of Fox & Staniland, Gordon, NSW. Contact him at wal@ foxstaniland.com.au 21
Wal Abramowicz, managing director, Fox & Staniland
Company directors have a number of responsibilities. The most important is to avoid trading while the company is insolvent. That
is, where the company is unable to pay its debts as they fall due. Insolvent trading can cause a spiralling effect which can be damaging to the economy. If an insolvent company places orders for which it cannot pay then the suppliers may not have the revenue to pay their own debts. This in turn will cause cashflow issues for their creditors and so on.
Directors are required to be aware of the solvency of their companies at all times. In the event that they become insolvent, directors must take steps to place the company into administration or liquidation. Directors who allow their companies to trade while insolvent can face civil and criminal penalties. These can include personal liability for losses incurred by creditors due to insolvent trading. It is the director of the company when the debt was incurred who is personally liable. The resignation of a director does not absolve them of that liability.
Due to the present Covid-19 pandemic, many businesses are struggling. The government’s priority has shifted from preventing insolvent trading to keeping as many businesses afloat as possible. In March 2020 new safe harbour provisions were added to the Corporations Act. The provisions covered a six-month period starting on 23 March. That period was later extended and will now expire on 31 December this year.
“It is the director of the company when the debt was incurred who is personally liable. The resignation of a director does not absolve them of that liability.”
A director who knows, or ought to know, that their company is insolvent would ordinarily be personally liable for any debts or be prosecuted in a criminal court. Under the safe harbour provisions, the director may be protected from liability. This protection arises if a debt was incurred in the ordinary
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