BridgePoint Group’s Russell Debney provides a steady hand when diving into solvency and directors’ liabilities in these stressful times.
Not as far as the health of you and your family is concerned. So continue to follow all of the social distancing and other hygiene recommendations from the medical experts until vaccination is available, or some miracle descends to remove Covid-19 from among us – and don’t hold your breath on that. But as far as your business is concerned, there may be some steps you can take to retain control and to continue to incur debts and contractual liabilities in the face of potential legal action and personal liability.
It is early days of course and barely a day goes by without a new announcement about government subsidies, tax relief, and concessional bank loans and deferments. Many creditors and contracting parties are also showing admirable restraint and willingness to help. And that may be enough for some businesses.
For many others, though, with cash flow drying up and with fixed outgoings and other liabilities, directors of many companies will very soon need to consider if the business can continue to trade. Until now, the law has been very clear about that and directors who permit their company to trade while insolvent can, among other things, be personally liable for the debts incurred. This can be the case whether creditors are pressing, or not.
To avoid this, the usual course is for an administrator to be appointed. The administrator will then work with the creditors to determine if the company can be saved in which case a DOCA is drafted – usually in a way that will meet creditor demands. The directors and shareholders have little or no say and may have no involvement at all in any go-forward plans. The directors may also be exposed to legal proceedings against them personally if, for example, they have been slow to act.
If a DOCA is not approved then, if the administrator does not hand the company back to the directors such as when a new financial backer is found, then a liquidator is called in to wind the company up and that is usually a lose/lose situation as assets are disposed of in a fire sale. Administration is very much a creditor-driven process, sometimes with little regard for the underlying business or, in the case of extraordinary circumstances like the onset of a pandemic causing an economy-wide breakdown in commerce, for the likelihood of the company recovering and resuming normal business at the end of the crisis as it would do if, for instance, it is given time.
Usually, it is true that the best people to manage a business through a crisis like the Covid-19 pandemic are the directors who are often the major stakeholders and who know their business intimately. And they are certainly best able to lead resumption of “normal” trading when things improve. But the solvency requirement and, not infrequently, an impatient creditor can thwart that.
Experienced sailors know that when a storm is about to hit, you look for a protected anchorage where you can ride out the storm and resume your passage when the storm abates. And that’s where the Safe Harbour provisions in Section 588GA of the Corporations Act may be available to enable a company to keep trading, to leave the directors in place without risking personal liability and to get through to the other side of the crisis – another span in the bridge perhaps?
Put simply, if a company is up-to-date with its employee entitlements and tax obligations then the directors may be able to develop a reconstruction plan that may result in a better outcome for the company (note, not necessarily in the best interests of the creditors alone) than having to cease trading, or to appoint an administrator. The sooner the plan is developed (and that means well before the company is unable to pay its debts) the better. The Safe Harbour provisions require that the directors, amongst other things, are properly informing themselves about the company’s financial position and are obtaining advice from an appropriately qualified entity that has been given sufficient information to be able to give that advice.
If you are concerned about your obligations as directors, saving an otherwise sound business and avoiding personal liability in the economic downturn ahead, then a conversation with BridgePoint Group and anchoring in a possible safe harbour from Covid-19 may be the best prescription for your corporate health.
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