Speaking to Accountants Daily, Jirsch Sutherland partner Ginette Muller said the upcoming banking royal commission report and the uncertainty in the residential property market would inevitably lead to a credit squeeze, putting directors at risk should their company start to go insolvent.
“The current property climate is weighing heavily on anyone who either owns, or aspires to own, real estate,” said Ms Muller.
“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.”
Ms Muller believes advisers should start spreading awareness on safe harbour provisions introduced in 2017, to protect directors from the potential threat of insolvent trading.
“Safe harbour protection is confidential and is not expensive as the director and senior staff remain in control,” said Ms Muller.
“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.”
According to Ms Muller, some measures that directors take could see them unwittingly trade while insolvent, including entering into repayment arrangements with the ATO, using other creditors by stretching out terms, selling surplus business assets, reducing overheads and streamlining staff.
Instead, directors are advised to seek safe harbour protection prior to negotiating repayment terms.
“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,” said Ms Muller.
“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.”
“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.”