‘Safe harbour’ laws can be complicated
Until very recently, directors of companies — the people who run the vast majority of businesses in Australia, from your corner store to global giants — were liable to serious penalties if they allowed their business to operate while insolvent whether they took reasonable action or not.
The fear of penalties gave them an incentive to place the business into administration or liquidation early and fast, rather than soldiering on or working their way out of trouble.
The problem was that it is very difficult in many businesses to work out where the line is between doing it tough and being insolvent.
Entrepreneurs and other business leaders were discouraged from taking even sensible business risks that they may otherwise have taken.
Many argued that the law was stifling innovation in the economy.
In September this year, the socalled “safe harbour” laws were passed by Federal Parliament.
Rather than having to sacrifice the company in order to safeguard themselves and avoid trying to trade out of difficulty, the law now gives directors the opportunity, under strict conditions, to take reasonable action to work out how to continue trading.
The new laws are complicated, and it remains to be seen how the courts will interpret them.
If you are worried about whether your business is insolvent, it is now even more important to take advice on the many options available to you.
But you cannot delay — the moment you suspect insolvency, you need to seek professional advice and be able to show you took sensible action.
Having accounting and legal advice will be critical if you are later prosecuted, to show that you took reasonable steps.
If you are worried about your exposure to another company you suspect is insolvent, you should also act quickly to get advice on how to navigate that situation — to contain the risks of missing out if the business is later placed into administration.
This is general information only and does not constitute specific legal advice. If you would like further information in relation to this matter or other legal matters, contact HHG Legal Group on 9481 2322.
Walpole author Sarah Drummond has been short-listed for the International Dublin Literary Award.