Insolvency – Dealing with It
Useful for: Business (including not-for-profit)
In Brief
- Insolvency is a serious issue, because company directors have a strict duty to prevent insolvent trading under section 588G of the Corporations Act.
- The duty applies to both executive (Board) and non-executive directors, and breach can lead to personal liability of the directors to the company and its creditors. Personal liability may extend to people who are deemed to be officers for the purposes of the Corporations Act (see related articles “Company Officers”).
- The Directors may be personally liable if they incur debts while the company is insolvent or the incurring of the debt will result in the company becoming insolvent. Civil penalties may apply as well as criminal sanctions if there is dishonesty involved.
- Safe Harbour provisions in the Corporations Act allow directors to trade insolvent temporarily, but only for the purposes of restructuring that is likely to produce a better outcome for the company than the alternatives of appointing an administrator or liquidating the company.
- Ipso Facto provisions in contracts, that is, a right of a contractual party to terminate a contract for no reason other than that the other party has committed an “insolvency event”, cannot be enforced while company is in “safe harbour”.
- A small business that is experiencing financial difficulties can now participate in the Small Business Restructuring Safe Harbour. This allows the directors to maintain control of the company while they work with a restructuring practitioner to develop a plan to present to creditors so that the company can trade out of difficulty without handing over control of the business to an Administrator or Liquidator.
- There are several eligibility criteria to enter the process for small business restructuring but the main one is that the business has total liabilities, (that is, creditors), not exceeding $1 million (exclusive of employee entitlements).
- A specialist insolvency lawyer, accountant or business advisor can assist you to find a restructuring practitioner.
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