To trade or not to trade after 31 December 2020?


BACK

To trade or not to trade after 31 December 2020?

As you may already know, on 23 March 2020, Federal Parliament passed the Coronavirus Economic Response Package Omnibus Bill 2020 (The COVID Act) which commenced on 25 March 2020.

In amongst other initiatives, the government sought to limit insolvent trading “during that period” by inserting Section 588 GAAA into the Corporations Act 2001.

This moratorium period is defined as the “six-month period” starting on the day the section commenced (or any longer prescribed by the Regulations).

The Federal Government has since then updated some initiatives, notably JobKeeper and JobSeeker, but has not amended the period by Regulation.  That is not to say they will not extend the period.

The conundrum

There is much debate as to whether companies who have traded insolvently during the period and who may continue to trade past the end of the period, may be subject to insolvent trading provisions, without the protection of Section 588 GAAA.

Many lawyers are adamant that the provision covers and protects directors from insolvent trading claims post the period, whilst others are equally as adamant the section only affords protection for the six months after the day the section commenced (this moratorium has been extended to 31 December 2020).

So, the conundrum is … do directors trade or not trade after 31 December 2020?

We are not lawyers so we cannot interpret the law.  We will leave the lawyers to argue it in the courts.  No doubt some will.

The risk 

What we know is risk.  The directors of companies that have been trading insolvently need to weigh up the risk of not taking action before 31 December 2020, and possibly having one of the lawyers that consider the moratorium has elapsed chase them for insolvent trading.

The risk-averse directors will not want to make legal precedence one way or another as they will also be making the legal fraternity somewhat richer (which we do not comment on either way).

Accordingly, the risk-averse directors should consider whether it is wiser to look at a restructuring of liabilities through a Voluntary Administration (VA) and a Deed of Company Arrangement (DOCA) to give themselves some peace of mind and their suppliers some certainty about the company’s future.

The possible solution 

A Deed of Company Arrangement (DOCA) can defer creditors for a defined time and still pay them up to 100% but prevent the prospect of a creditor taking action, winding up the company and chasing directors for insolvent trading (the six-month moratorium on winding up ceases 31 December 2020).

The impact 

Should an “insolvent trading claim” be successful post the six-month moratorium period, (remembering this is where lawyers have differing opinions), the directors of the company in question may be liable for all debts, including the debts incurred during the six-month period.

So, to trade or not to trade is the question?  How much do directors want to risk?

If you would like to know more about DOCAs or need help with your particular situation, please contact Riad Tayeh at dVT Group on (02) 9633 3333 or by email mail@dvtgroup.com.au.

dVT Group is a business advisory firm that specialises in business turnaround, insolvency (both corporate and personal), business valuations and business strategy support.

 

November 2020