A business can continue to operate and incur debt in the ordinary course of running their business (without fear of being punished for insolvent trading) due to temporary safe-harbour rules that have been put in place that allow flexibility. To rely on the COVID safe harbour rules, the debt must be incurred:
- in the ordinary course of the company’s business
- originally in the 6 months commencing 25 Mar 2020, but now extended to 31 December,
- before the appointment of an administrator
- appoint an administrator or liquidator prior to 31 December, 2020 (if not done then the COVID safe harbour rules will not apply at all)
These measures may provide the opportunity to develop a strategy to:
- avoid pursuing voluntary administration
- reclaim former business from before the effects of COVID-19
- return to normal operations
The company directors must still:
- act in the best interest of the company as a whole
- act with care, diligence and good faith
- not use their position or information obtained as a director to gain an advantage or cause
detriment to the company
Under the new rules, businesses will have additional time to respond to creditors as well giving them
time to review their operations, make changes to their business to enable it to survive. Prior to
COVID-19 the minimum threshold for a creditor to issue a demand under the Corporations Act was
$2,000 and the business had 21 days to respond. The new measures allow the threshold to increase
to $20,000 and a grace period of 6 months to respond.
Not responding within the specified time creates an assumption that the company is insolvent.
These temporary measures allow a director who would normally be personally liable for the
increased debts to be relieved of this liability for debts incurred during the ordinary operations of
the business. All debts must still be paid and any dishonesty or fraud is still illegal.
What does this mean for you?
You have an opportunity to structure a strategy that may return your business to its prior trading
sustainability without the added pressure of personal liability for breaches of the Corporations Act.
This not an opportunity for the company to rest on its laurels but to reinvigorate the business to
return to the trading position before COVID-19 impacted trading.
To take “advantage” of these measures you need to have a strategy put in place. If you need help, feel free to contact Marsh & Partners to discuss the options. You can reach us on (07) 3023 4800 or at email@example.com.
You can find out more about working with Marsh & Partners here. As your Absolute.Account.Ability partner we’re on a mission to make your business life better. We’ll help you set goals for your business, devise an Action Plan to make them happen and meet with you regularly to ensure you stay on track.
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