A company is insolvent when it is unable to pay its debts when they become due and payable and it is a director’s duty to prevent insolvent trading pursuant to section 588GA of the Corporations Act 2001 (NSW), by placing the company in administration or liquidation.
This primary position, has been altered by the safe harbour reforms that came into effect on and from 19 September 2017. The reforms are designed to protect directors who actively attempt to better the outcome for the creditors of the company, through an established strategy and proper professional advice.
The reforms provide that
- if, when a director starts to suspect the company may become or be insolvent,
- the director starts developing one or more courses of action that are reasonably likely to lead to a better outcome (i.e. not the immediate appointment of an administrator or liquidator),
- the director will be protected from any insolvent trading in performance of such a course of action.
The Court will consider, among other things, the below conduct in determining whether the director’s course of action was reasonably likely to result in a better outcome for creditors:
- if they informed themselves of the company’s financial position and maintained appropriate financial records;
- if they prevented misconduct by company officers and employees;
- if they obtained proper professional advice; and
- if they developed and implemented a restructuring plan.
It is important to note are that the company must continue to pay all of its employee entitlements and lodge all reports in relation to tax.
Please contact Walker & George to either discuss how we may assist your company or advise you in your capacity as director to ensure you are protected under the safe-harbour provisions.