Temporary changes to insolvency laws aimed at supporting small businesses will end on 31 December 2020. After this date, there is no retrospective protection for insolvent trading and company directors may be held personally liable.
While this is a strict interpretation of the protection measures (noting explanatory memorandums for the legislation add ambiguity to the interpretation of the law), the law is still the law. Until there is further clarification from the government, any company directors trading while insolvent after 31 December 2020 are potentially at risk.
We outline the insolvency measures below.
Current insolvent trading protections until 31 December 2020
One of the measures introduced in March 2020 was aimed to give directors confidence to continue to trade through the crisis by providing them with protection from personal liability if the company was to fail during this period.
Legislation (section 588GAAA of the Corporations Act 2001) states directors can only rely on the relief granted for insolvent trading if the company enters external administration prior to 31 December 2020.
Proposed insolvency process from 1 January 2021
The Government has proposed new measures from 1 January for a simplified liquidation and small business restructuring process. However the new measures may not help if directors intend to rely on insolvent trading relief.
The government has stated any company wishing to utilise the new restructuring process may be granted an extension of the current, temporary insolvent trading protections but these details are yet to be released.
What you need to do
Whilst there is only two months before the insolvent trading measures end, the specifics of the new January measures are yet to be released. There is great risk involved for company directors and time is running out to deliberate and, importantly, implement advice prior to the 31 December deadline.
We recommend directors urgently seek professional advice if any of the following apply:
- Their company is experiencing cash flow pressure;
- Their company is currently trading whilst insolvent; or
- The directors are unaware of the company’s current position.