Business leaders may increasingly find themselves falling afoul of the law, with an insolvency specialist warning that a looming credit squeeze could see the volume of such cases increase rapidly.
Ginette Muller (pictured), of insolvency firm Jirsch Sutherland, said that the property downturn and banking royal commission are weighing heavily on banks and lenders, which are in turn tightening the screws on borrowers.
“And this is particularly acute with small business, where access to finance is usually conditional on the bank securing the loan against the director’s house,” she said.
According to Ms Muller, business leaders tend to be a highly resourceful bunch and, when faced with such a squeeze, will often look at a number of ways to rejig the cash flows, including entering repayment agreements with the ATO, selling surplus business assets, stretching terms with creditors, streamlining staff and reducing overheads.
But she warned that this could cover the fact that the business is technically trading while insolvent, in breach of company rules.
“Australia has some of the most draconian insolvent trading laws in the world, and the reality is, if you are a director and you take any of these actions, you may be about to commit an offence,” Ms Muller warned.
In a bid to overcome this, Ms Muller urged business leaders to look at Safe Harbour provisions, which she said were introduced in 2017, before renegotiating any payment terms.
“We are starting to see it appear in more liquidations where directors are claiming immunity from prosecution and similarly being exempt from paying compensation to the liquidator,” she said.
“The whole process makes companies more resilient because, to stay in Safe Harbour, directors need to be fully focused on their operations and across the details. This has its own rewards.
“Safe Harbour protection is confidential and is not expensive as the director and senior staff remain in control.”
Ms Muller added: “There are rules they need to comply with to ensure they have a plan and are not driving themselves and creditors off a cliff. In exchange for their diligence, they can avoid the potential threat of insolvent trading. Safe Harbour is just another word for insurance.”
Adam Zuchetti is the editor of My Business, and has steered the publication’s editorial direction since early 2016.
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