The world has suddenly been plunged into a whole new chapter when it comes to owning a business. Some of the old rules don’t seem to apply – especially when the government can mandate an almost instant closure of your business.

This week we’re now starting to hear about the path back to recovery in a post-crisis world, albeit VIC and NSW are a bit behind some of the other states. However, as hopeful as ‘reopening’ sounds, some business owners might find themselves teetering dangerously close to (if not dangling over) the edge of one of ASICs key rules. Which rule is that? The ‘thou shalt not trade whilst insolvent’ one.

So today we’d look at what that actually means, how you know if you’re doing it, what some of the latest legislation changes, passed as one of the first Covid-19 economic stability measures, are and what options are available to you if you find yourself facing insolvency.

What is insolvent trading?

Insolvent trading is all about being unable to pay your company’s debts as and when they fall due. This includes debts like superannuation, staff entitlements or tax debt or not having enough working capital (either cash or borrowings) for your company’s future obligations.

Is it really all that bad?

Yes. Once a company becomes insolvent, it’s an offence for the directors of the company to continue and directors can be held personally liable for any debt incurred whilst trading insolvently. And that means the protections directors enjoy under the structure of a company are likely to no longer apply. And it can also mean that you’ll no longer be able to hold a company directorship in the future.

Emergency provisions for insolvent trading during Covid-19

The Morrison Government put in place a temporary safe harbour for directors on March 25, 2020 (and only for six months) that provides an exemption from personal liability for insolvent trading, as long as certain conditions are met. The idea being that the safe harbour provides a safety net for financially distressed businesses to continue to operate during Covid and the initial recovery period; thus avoiding unnecessary business wind-ups.

What are the certain conditions directors have to meet?

A director won’t be personally liable for insolvent trading in respect of a debt incurred by a company if the debt is incurred;

  • In the ordinary course of the company’s business (and this is likely to vary from business to business) and
  • Within the six-month period from 25 March to 25 September 2020, or longer as prescribed by the legislation and
  • Before appointing any administrator or liquidator during the safe harbour application period.

The safe harbour does not excuse company directors from their other duties to maintain due diligence, act in good faith and in the best interests of the company as a whole at all times.

You can read more on the ASIC website.

How do you avoid insolvent trading (if at all possible)?

Regardless of whether insolvent trading happens because of Covid-19, or something else going awry in the future, as with all things business, it pays to know and understand your numbers. That means being vigilant with your company finances specifically around overdue tax bills, extending creditors payment terms further and further out, continuing losses, lack of working capital and decreasing net assets.

If in doubt, it’s always better to seek assistance from an independent, external qualified accounting professional sooner rather than later. Better to attempt a significant turnaround or go into voluntary administration to try to save the company (like Virgin Australia had to do recently). That way you might be able to salvage some parts of your business rather. However if you put your head in the sand and hope it all goes away (aka do nothing), it’s likely to mean forced liquidation where an externally appointed team will seek to liquidate as many assets (including those owned by you personally if you fall outside the temporary safe harbour timing or conditions) as needed as quickly as possible to repay the debt owed.

If you’ve found your company facing some financial hurdles or cash flow problems and need a qualified accounting professional at arm’s length to talk to, we’d love to help. You can call us on 02 6023 1700 or reach out to us via the form below.

Got a question? Get in touch

If you've got financial or business questions, or you just want to run something by us, we'd be delighted to really talk to you – in person, over the phone - call us on 02 6023 1700 - or you can use the form below and we'll get back to you.

7 + 6 =

Malcare WordPress Security