How can I protect myself if my business becomes insolvent?
We survived the bushfires but now we are ALL dealing with the coronavirus (COVID-19).
Much has been written about the supply and demand side shocks that COVID-19 may cause and many businesses are closely looking at their force majeure provisions in their unfulfilled contracts. Force majeure provisions may come into effect if a circumstance(s) beyond the control of a party to a contract arises. The provisions, if properly drawn, enable a party to a contract to escape liability for failing to perform the contract as a result of the circumstance.
For those that can’t escape liability, cash flow, liquidity and solvency may become an issue. The test for insolvency in Australia is whether a business can pay its debts as and when they fall due. In other words it’s a cash flow test, not a balance sheet test. The disruption to business due to COVID-19 has the potential to cause solvency issues for global enterprises.
Australian company directors have a very clear obligation to ensure that a company does not incur debts while insolvent. If they breach this duty, a director can be personally liable to pay the debts the company incurs. This is known as insolvent trading and can arise where:
1. A company incurs a debt while insolvent (or becomes insolvent by incurring that debt);
2. There are reasonable grounds for suspecting a company was insolvent (or would become insolvent) when the debt was incurred; and
3. The director(s) is aware of such grounds or a reasonable person would be.
There are a number of ways that a director can seek sanctuary from being personally liable for the company’s debts. The best protection a company director can have against being held liable for a company’s debts is to ensure that his or her assets have been protected by developing an asset protection strategy. With proper legal advice a company can be structured such that a director will not be ‘placed in the line of fire’ in the event that the company becomes insolvent. For some this may be a little late given the ‘claw back’ provisions of the Corporations Act giving liquidators the opportunity to claw back 6 months’ worth of payments made by a company. That means that the time to act is NOW!!!
For more information about how you may be able to rely on force majeure provisions, or a review of your current contracts that contain force majeure provisions, or how you may be able to mitigate your exposure to company debts, telephone our office to make an appointment to speak to one of our experienced practitioners.
Given the current concerns with social distancing, all inquiries to Bambrick Legal ought to be made by way of telephone or email in the first instance.