Coronavirus has had a significant impact on many aspects of our lives. Businesses around the world have been heavily hit, which has resulted in Australia’s economy entering its first recession in nearly 30 years.
To help combat the impact the virus will have on our economy, the State and Federal governments have introduced several measures to assist individuals and businesses, including stimulus packages, loans and other relief measures.
One key measure introduced by the Morrison Government was a temporary relief from insolvent trading for company directors. As you may know, a director has a duty to prevent a company from incurring debt whilst it is insolvent. If a director fails to do this, they can be held personally liable for the debts incurred whilst the company is trading insolvent.
The temporary measures, introduced in late March, provided relief for directors from personal liability for insolvent trading for a 6 month period due to expire on 25 September 2020. This relief has now been extended to 31 December 2020.
A number of leading figures in our industry (and other industries for that matter) have debated the necessity of the extension, together with various other extensions recently announced. A quick Google search will point you in the right direction if you want to explore these debates further.
The purpose of this article is to highlight a number of other matters that directors should be aware of when making decisions regarding the ongoing operation of their business.
What are Director Duties?
Outside of a director’s duty to prevent insolvent trading, there are various other duties a director owes to a company, as well as other potential avenues for recourse against directors that should be carefully considered by directors and their advisors, including:
- Statutory Duties: a director owes various duties to a company outlined in the Corporations Act 2001 (Cth), including to act with care and diligence in good faith, and in the best interests of the company. Whilst these duties are owed to the company, that duty is taken to be owed to creditors in instances where a company is insolvent. Whilst a director may be temporarily relieved of personal liability from their duty to prevent insolvent trading, reckless or dishonest trading and incurring debts in instances where a company clearly should not be operating may leave a director open to prosecution. Criminal action can also be prosecuted in instances where there has been a reckless or dishonest breach of the director’s duties.
- Personal Guarantees: it is not uncommon for directors to provide personal guarantees to lenders, suppliers and other creditors in the course of their business. The Federal government recently extended the temporary increases in limits for issuing bankruptcy notices and statutory demands and the timeframe for compliance with these notices, making it more difficult for businesses to recover debts in the traditional way. Suppliers of companies should therefore consider alternate options, which may include pursuing recovery of debts from guarantors listed on credit applications. Creditors may obtain judgment against a director under a personal guarantee, which may have significant impacts on directors personally, including affecting credit ratings, breaching banking covenants and exposing director’s personal assets to attack (e.g. enforcement warrants, garnishees, etc.).
- Superannuation & Tax Liabilities: directors can be held liable for unpaid company superannuation and tax debts. Directors should ensure they are reporting their tax and superannuation obligations on time, even in the event they cannot always pay these liabilities in full at the time. The director penalty regime is unaffected by the relief measures introduced, and whilst the ATO may take a lenient approach to directors who have unpaid superannuation and tax liabilities during the COVID moratorium period, there is no guarantee that this will be the case.
Where to From Here?
Whilst the government relief measures are aimed at providing comfort to directors to continue operating during the pandemic, directors should not take that as carte blanche approval to continue trading a business that is consistently unprofitable. The above analysis discusses just a few other ways a director may be impacted by continuing to trade a business in the current climate.
Directors should carefully consider the long-term viability of their business beyond COVID and the current recession, and seek advice from suitably qualified advisers as to their options to protect themselves personally from claims being made against them down the line.