On 25 March 2020, the Federal Government as part of its Coronavirus Economic Response Package Omnibus Act 2020 introduced relief to directors from personal exposure associated with trading a company whilst insolvent.
Given the unprecedented impact of the COVID-19 on many businesses in Australia, which directors had no control over, this was a sensible initiative from the Federal Government.
The temporary relief measures are due to end on 31 December 2020.
In this regard, the present relief period applies from 25 March 2020 to 31 December 2020.
Recently the Australian Restructuring Insolvency & Turnaround Association publicised that the relief from Insolvent Trading provided to directors during the period of 25 March 2020 to 31 December 2020 may only be available to the directors should their company enters External Administration, such as a Voluntary Administration or Liquidation, prior to the lifting of the temporary measures on 31 December 2020.
ARITA has highlighted the relief may not be available based on the specific wording of subparagraph 1(c) of Section 588GAAA of the Corporations Act 2001 (“the Act”), even if it is entirely contrary to the materials published by Treasury at the time of the introduction of s 588GAAA of the Act.
So what does this mean?
If you or your client have been trading a business and incurring debts that you know the business can not pay when the debts are due, you or your client’s personal exposure to Insolvent Trading during the period of 25 March 2020 to 31 December 2020 may continue indefinitely if the company is not placed into Voluntary Administration or Liquidation prior 31 December 2020.
What if I want to trade through the new year period and place the company into liquidation in early 2021?
You may not have the protection available to you for trading the company whilst it was insolvent from 25 March 2020 to 31 December 2020.
If the company is wound up after 31 December 2020, a liquidator may be able to initiate an Insolvent Trading claim against the director for debts incurred which remain outstanding from 25 March 2020 to the date of liquidation based on ARITA’s interpretation on Section 588GAAA of the Act.
So what should I do?
Get advice and act.
You should speak with your accountant, solicitor or contact the Directors at Langdon & Grant to understand your options and make an informed decision.
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