Directors Are Now Protected From Insolvent Trading

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Is your company unable to pay its debts?

Having the expertise of accountants in Sydney in insolvency and trading laws would be particularly beneficial for ensuring compliance with Section 588G of the Corporations Act 2001, which imposes a duty on directors to prevent their company from engaging in insolvent trading. If a director allowed their company to continue trading after it became insolvent and allowed it to incur debts, they became personally liable for those debts.

A consequence of this section was that it encouraged directors to prematurely engage their company in formal insolvency processes to protect themselves, even where the company could have traded successfully.

New sections 588GA & 588GB provide “Safe Harbour Provisions” from 18 September 2017.

Under these “Safe Harbour Provisions”, a director will not be personally liable for debt incurred by their company while the company was insolvent where:

  • The director started developing a “course of action” that was reasonably likely to lead to a “better outcome” (i.e. better than the appointment of an administrator or liquidator) for the company, and
  • the debts were incurred directly or indirectly in connection with the course of action.

The Safe Harbour Provisions only apply from the time the director starts developing a course of action until the earlier of:

  • failure to implement the course of action
  • ceasing the course of action
  • the course of action ceases to be reasonably likely to lead to a better outcome
  • the company appoints an administrator or liquidator

If you would like to discuss the protection afforded by the Safe Harbour Provisions, don’t hesitate to contact your client manager.

Kreston Stanley Williamson Team

*Correct as of August 2018

Disclaimer – Kreston Stanley Williamson has produced this article to serve its clients and associates. The information contained in the article is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas in this article, you must seek advice about your circumstances. Liability is limited by a scheme approved under professional standards legislation.

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