Directors beware – temporary insolvent trading protection may not be guaranteed

In March 2020, the Federal Government introduced a raft of measures to combat the economic impact of the COVID-19 pandemic, including legislation which provided directors with temporary relief (up to six months) from personal liability for insolvent trading. Earlier this month, it was announced that this temporary relief would be extended to 31 December 2020.

Under these measures, the temporary protection from personal liability for insolvent trading only relates to debts which were incurred:-

1.    In the ordinary course of business;

2.    During the period 25 March 2020 to 31 December 2020 (unless this date is subsequently extended further); and

3.    Before the appointment of an Administrator or Liquidator during that period.

Based on the current wording of the legislation, directors need to be aware that they may not be automatically protected under this legislation unless they proceed to appoint an Administrator or Liquidator prior to 31 December 2020.

Should a director fail to appoint an Administrator or Liquidator prior to 31 December 2020, then they may be made personally liable for any debts incurred by a company whilst it was insolvent, including any debt incurred during the period 25 March 2020 to 31 December 2020.

It should be noted that this may not have been the intention of Parliament when drafting the legislation and therefore, it will be interesting to see whether any amendments are made to ensure the protection is provided.

Further, the temporary protections do not absolve a director of their general fiduciary duties.

If you are concerned about insolvency, act early to preserve any value in the business by contacting Rodgers Reidy to discuss the available options.

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