Bankruptcy concerns are becoming very real for many clients in the succession planning space.

More clients are concerned with the risk of having their family assets exposed to a bankruptcy during their lifetime, or the risk that the beneficiaries of their estate may have an inheritance exposed to creditors.

This is a particular concern for clients with partners and children in high-risk occupations, such as professionals and directors of companies, as they can be personally liable for debts owed by their business or negligence claims.

The temporary safe harbour introduced by the Federal Government is not a panacea for directors of distressed businesses. It may be time to act now.

The Coronavirus Economic Response Package Omnibus Act 2020 introduced relief measures in the second stage of the Federal Government’s plan to 'cushion the economic impact of the coronavirus and help build a bridge to recovery'.^[1]

Despite the extension of the insolvent trading moratorium, directors should still satisfy the usual requirements of the safe harbour against insolvent trading if they can.

The Federal Government today announced the temporary six-month moratorium from insolvent trading liability has been extended until 31 December 2020. Temporary changes to statutory demands and bankruptcy notices requiring a debt of $20,000 and allowing six months to pay the amount demanded will also be extended to this date. These measures had otherwise been due to expire later this month.

The announcement gives much-needed clarity and certainty for the remainder of 2020.

With REDgroup administrators, Ferrier Hodgson, desperately searching for a buyer for REDgroup's Australian book business, the consequences for franchisees remains uncertain.  Whilst the nine remaining Borders bookstores are set to close, no decision has yet been made on the future of Angus & Robertson (A&R).

Following the 2011/2012 Federal Budget announcement that directors will be made personally liable for any unpaid superannuation guarantee contributions, Treasury has released the Tax Laws Amendment (2011 Measures No. 7) Bill 2011 (Bill).

The legislation extends the current director penalty regime for unpaid PAYG. Whilst the announcement from Bill Shorten MP on 5 July 2011 highlights the need to prevent companies engaging in phoenix activities, the legislation will have a much broader impact.

Every director of an Australian company is under a legal duty to prevent the company incurring a debt when the company is insolvent (or where that debt will cause the company to become insolvent).

The Australian Securities and Investments Commission's (ASIC) new Regulatory Guide sets out four key principles which directors should follow to meet their obligation to prevent insolvent trading.

The Regulatory Guide also sets out ASIC's approach to assessing whether a director has breached their duty.

Background

The Bankruptcy Act 1966 (Cth) was amended to address the outcome of the High Court's decision in Cook v Benson1. It was held in that case that a trustee in bankruptcy could not recover amounts transferred from a retirement fund to another superannuation fund after the bankruptcy of the member as the amounts rolled over to the fund by or on behalf of the member were made in good faith and for consideration (ie the member had a right to receive benefits on retirement).

In response to a degree of uncertainty as to a director's statutory duty to prevent insolvent trading, the Australian Securities and Investments Commission (ASIC) has released a consultation paper containing a number of proposals on this fundamental duty (Consultation Paper 124: Duty to prevent insolvent trading: Guide for directors). Importantly for directors, the consultation paper (which contains a draft Regulatory Guide) identifies the factors ASIC considers when deciding to commence an investigation in relation to possible insolvent trading.

The different types of insolvency

When a corporate tenant becomes insolvent, the landlord's rights depend upon the type of insolvency administration to which the tenant is subjected. Being familiar with the different options and the ways in which they are administered will enable property owners to act early and put themselves in the best possible position when faced with an insolvent (or potentially insolvent) tenant.

The three most common forms of insolvency administration which may affect corporate tenants are discussed below.