A company is insolvent if it cannot pay amounts that it owes to creditors when they become due and payable. There are a number of issues that a Liquidator will look at in determining whether to pursue an insolvent trading claim.
Due to the coronavirus pandemic the Federal Government has made various changes to the law relating to insolvent trading.
So, how will this all work?
Overview of insolvent trading
A Liquidator can pursue a claim for insolvent trading against a director, if:
- The company was insolvent for a period;
- While the company was insolvent it incurred debts which it did not pay; and
- The director had reasonable grounds for suspecting that the company was insolvent, or a reasonable person would have had reasonable grounds for so suspecting.
The amount of an insolvent trading claim will be the total of the unpaid debts incurred by a company whilst it was insolvent.
Changes to insolvent trading provisions because of coronavirus
To make sure that companies have confidence to continue to trade through the coronavirus health crisis with the aim of returning to viability when the crisis has passed, the Federal Government has introduced amendments to the insolvent trading provisions. Under these amendments, directors are relieved of their duty to prevent insolvent trading with respect to any debts incurred in the ordinary course of the company’s business. This means directors will generally not be liable for an insolvent trading claim for the period the amendments are in place. However, the amendments will only apply for six months, being until September 2020.
There may still be a claim available against a director if there has been insolvent trading in cases of dishonesty and fraud and in these circumstances criminal penalties may also apply.
The Government has provided the example below of how the changes to the insolvent trading provisions will apply:
Steph, Mon and David own a small company that operates a chain of yoga studios in Sydney. Social distancing measures require the participants in the yoga class to be significantly reduced. As a result, their company incurs more debt, to the point where it cannot meet its debts as and when they become due and payable. Under the provisions of the Corporations Act, the three owners would be personally liable if the business took on further debt without entering an insolvency procedure like voluntary administration or liquidation. However, during the six-month period in which the temporary relief is offered, their business can continue to open their yoga studios so that they can maintain their customers and quickly resume normal operations when the crisis has passed, and continue to incur debt. When economic conditions improve, the company can pay back the debt incurred.
How can we help?
If your company is having difficulty paying its debts, then you should urgently get professional advice. And TAX DEBT SOLVED can help. So, in these circumstances please contact us for a free, no-obligation consultation, contact us here.