Time to stay sharply focused
Your company can’t now be liquidated and you can’t be bankrupted without six months’ notice, and as a director you can’t be held personally responsible for insolvent trading for six months from 25 March this year.
However, you are in grievous error if you think this is a time to relax - to ignore the reality there won’t be inevitable accountability for sins of commission and omission in business.
Be aware the Federal Government has NOT suspended a number of legal actions that can still be taken against you as a director of a company that goes into liquidation during the COVID-19 crisis.
Remember, procrastination is the thief of time and it is now a very valuable time to stay sharply focused. If your business is in financial stress you should be assessing the extent of it and accordingly, options available to you. You should be working to protect your business, its assets and your personal assets.
Danger of increasing liabilities
Avoid increasing debts. Are you one of many small business owners whose personal finances are linked to their business? Have you guaranteed your business’s bank loans, debts to suppliers or a landlord? Point is, private business debts are often intertwined and hard to separate in times of financial stress.
You may be able to persuade your landlord to reduce the rent and you may be able to defer payment of various other debts, but eventually you will have to pay guaranteed debts personally, as well as any interest or legal costs that may be associated with debt recovery.
Bear in mind too that your company’s unpaid PAYG, GST and SGC can also become your personal responsibility under the Director Penalty Notice (DPN) regime.
You can of course defer meeting your company’s tax obligations by negotiating with the Australian Tax Office, but if you fail to honour whatever arrangement you make, then the company’s tax debts become your personal debts.
As this article was being written, it was still unclear whether or not the government would end existing temporary changes to insolvency law, or whether the legislation would be extended or otherwise modified as originally planned. As a business owner all this represents for you is a time difference for the inevitable effect of consequences stemming from what’s done, or not done now, for self-protection and protection for your business.
Possibilities of legal actions
While insolvent trading is a well-known criminal charge that can be laid against directors of liquidated companies, there are many other legal actions that can be brought against directors in these circumstances.
For example, directors can find themselves in court facing charges related to alleged unreasonable or uncommercial transactions where it’s alleged their companies were propelled into certain agreements not in the company interests.
Claims of breaching directors’ duties can cover a range of issues where it’s alleged companies have suffered losses because of directors’ actions or lack of appropriate actions – that may well include company losses as a result of insolvent trading.
Directors who delay responsible action when their companies are at risk of financial collapse, are not only likely to lose their businesses but also their personal assets. That can occur at the best of times, so all the more reason for directors to now use the current government-provided legislative breathing space to best advantage.
What you should be doing
Examine your business to analyse its and your current financial situation and get expert help with this analysis if necessary. Where there are debts, determine which are the company’s and which are, or could become, your personal responsibility.
If it’s clear from this information that your company is in serious trouble, consider such options as:
- Making informal arrangements with creditors that will allow you to continue trading
- Entering into formal administration with a Deed of Company Arrangement
- An orderly closing down of the business
- Could the company benefit from a business, financial or management restructure or a change in direction. If so the “Safe Harbour” provisions maybe your friend.
- Arranging informal agreements with creditors that will protect you personally should the company have to shut down
- Looking at personal insolvency options that would include a possible Part X agreement or bankruptcy
Without first compiling accurate information, an attempt to exercise any of these options is doomed to failure.
However, the converse of this proposition is true. Good decision-making about procedure stems from accurate information that will dictate what you should attempt first, and what option may be viable if a preferred one isn’t.
If you’re a business owner, we believe you should be considering or doing the above and Macks Advisory is happy to provide expert help with any aspect of this advice.