- They are directors at the time the company incurs the debt;
- The company is insolvent at the time or becomes insolvent by incurring that debt; and
- At that time, there are reasonable grounds for suspecting that the company is insolvent or would become insolvent.
Essentially, these are creditor protection provisions which actually don’t work all that well in practical terms. From the creditor’s perspective, successful action against directors is very rare and from the company’s perspective the provisions are a disincentive to “trade on” with a view to business recovery due to the potential risks to directors of doing that.
From September this year new legislation introduced so-called “safe harbour” provisions for company directors.
Directors will not be liable for certain debts incurred whilst the company is insolvent, if after suspecting insolvency, directors start taking a course of action “reasonably likely to lead to a better outcome for both the company and its creditors as a whole” than would be the case if the company immediately appointed an administrator or liquidator.
For the purposes of working out whether a particular course of action is reasonably likely to have a better outcome for the company, factors including whether directors-
- are properly informing themselves of the company’s financial position;
- have taken steps to prevent misconduct by officers and employees of the company;
- have taken steps to ensure the company is keeping appropriate records;
- are obtaining advice from an appropriate qualified person; and
- are developing a plan for a restructure which is designed to improve the company’s financial position.
Directors seeking to rely upon these provisions should note –
- The onus of proving that the safe harbour should apply rests upon the directors;
- It only covers debts that are incurred in connection with the course of action during the period commencing when the course of action is first taken. It does not apply to debts incurred earlier;
- The safe harbour can’t be relied upon if the company is failing to pay employee entitlements (including superannuation) or failing to comply with taxation law requirements.
Company laws are complex. At Everingham Solomons we have the expertise to assist you with all company law matters because Helping You is Our Business.
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