Insolvency trading laws in Australia impose severe penalties on company directors where there are reasonable grounds to suspect that a company is trading whilst insolvent: up to $200,000 personal penalty in compensation to creditors and up to five years in jail if dishonesty is a factor.
The threat of such punishments can mean directors of struggling companies race to choose a path of administration rather than look for viable ways to redirect a company’s fortune over the longer term, such as using an angel investor’s funds or negotiating with a start-up.
The new legislation does not absolve a director from the insolvency trading laws, but it does provide a ‘safe harbour’ wherein a director is deemed not to be personally liable for debts incurred whilst s/he is developing and implementing a course of action that is “reasonably likely to lead to a better outcome for the company” than proceeding immediately down the administration path.
This new ‘safe harbour’ can be effectively entered by a director only where a company has met its employee entitlements, superannuation and tax obligations. We suggest you regularly speak to your accountant anyway about these usual obligations to assess your company’s financial health.
Under the new rules, directors will only be held personally liable for debts incurred during insolvency prior to any course of action considered reasonable in order to restructure a failing company.
Within a ‘safe harbour’, using their strong relationships with suppliers and customers and with a real determination to turn around downward performance, a director can take a distressed company and create positive financial momentum giving a business a second chance at operating solvent.
What is the best course of action for an insolvent company?
- Access timely and appropriate professional advice about whether a ‘safe harbour’ is applicable to you
- Document a plan with measurable outcomes which will assist with the assessment of the reasonableness of the course of action.
- Remain vigilant of the realities of a company’s financial position and adjust a plan accordingly, working closely with your accountant and coordinating with any administrator/s involved during this difficult time.
How can YML help?
Talk to our Accountants today to see how YML Group can assist you with navigating the new ‘Safe Harbour’ available to directors. Contact us on (02) 8383 4400 or by visiting the Contact Us page on our website.