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  • Gabriella Ferraro

Insolvent Trading – Before, during and after COVID-19

By Dannielle Wright

What is insolvent trading?

A company is rendered insolvent if it is unable to pay its debts as and when they fall due. Section 588G of the Corporations Act 2001 imposes a positive obligation on directors to prevent trading whilst insolvent and incurring further debt that the company cannot repay. In the event a director is found in breach of their duty to prevent insolvent trading, they may be required to personally compensate the company, exposing their personal assets to creditors.

An insolvent trading claim may be brought on the liquidation of the company by its liquidator, creditor or even the Australian Securities & Investment Commission.

Insolvent trading and COVID-19

During the whirlwind of the COVID-19 pandemic, legislation was enacted by the Federal Government to provide temporary relief to financially distressed businesses. Specifically, a temporary ‘safe harbour’ was introduced to provide relief for directors from potential personal liability for insolvent trading. These emergency measures were short-lived and the temporary relief expired on 31 December 2020.

Post COVID-19

In the wake of the pandemic and expiration of the safe harbour legislation, the true effects of COVID-19 on small businesses were expected to be felt and a tidal wave of insolvencies were forecasted. As such, in an attempt to address the anticipated rise in insolvencies, from 1 January 2021, new insolvency reforms took effect. These permanent insolvency law reforms were intended to assist small businesses and provide them with a streamline process to restructure their existing debts and maximise their ongoing business. It is important to note that these reforms apply strictly to ‘small businesses’ being those with liabilities less than AUD$1 million.

Our office strongly encourages directors to seek early advice from a professional, independent adviser about their company’s financial affairs and options available to manage the disruption caused by COVID-19.

If you require assistance with resolving and/or pursuing insolvent trading claims, please contact our office for advice on the prospects of claims and defences available. You can contact our office on (03) 9311 8911 to organise an initial appointment with one of our experience commercial lawyers.

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