If a company incurs a debt when the director is aware, suspect or ought to suspect that the company is insolvent, the director would have breached his/her duty to prevent insolvent trading. The consequences of that breach range from fines (civil penalties) to being required to pay the amount of the debt to the company. In the most egregious cases, criminal charges may be filed (e.g. where the directors were dishonest). The directors may also face disqualification from managing a company.
In light of the current COVID19 pandemic, the government has created temporary relief from the duty to prevent insolvent trading. From 23 March 2020, there is a six-month moratorium on insolvent trading liability for debts incurred by the company in the ordinary course of business.
The relief gives directors the flexibility to continue to trade in difficult economic conditions without being pressured to put their companies in administration if there is a chance they might be insolvent.
However, directors should be aware that this protection will only cover debts incurred in the ordinary course of business – it does not
cover special debts. Egregious cases of dishonesty and fraud will still be subject to criminal penalties.
Directors should be careful in which debts they incur and take quick steps to prepare a detailed business plan to survive this pandemic. If you are concerned about your obligations as a director, we can provide advice to assist you in managing the risks.
Aperion is offering a free 30-minute consultation for those who might want to know - or get a second opinion - about their particular situation in the current environment and want to discuss options available.
If you want to take advantage of this invitation, please call:
Mark Allen on 0417 251 354 or firstname.lastname@example.org.
Peter Lightbody on 0419 166 828 or email@example.com.
Ashley Cheng on 0408 176 489 or firstname.lastname@example.org.