Force Majeure Provisions & Insolvency

Force majeure provisions may come into effect if a circumstance(s) beyond the control of a party to a contract arises.

The provisions, if properly drawn, enable a party to a contract to escape liability for failing to perform the contract as a result of the circumstance.

For those who can’t escape liability, cash flow, liquidity and solvency may become an issue.

The test for insolvency in Australia is whether a business can pay its debts as and when they fall due.

It’s a Cash Flow Test, Not a Balance Sheet Test

Australian company directors have a very clear obligation to ensure that a company does not incur debts while insolvent.

If they breach this duty, a director can be personally liable to pay the debts the company incurs.

This is known as insolvent trading and can arise where:

1. A company incurs a debt while insolvent (or becomes insolvent by incurring that debt);
2. There are reasonable grounds for suspecting a company was insolvent (or would become insolvent) when the debt was incurred; and
3. The director(s) is aware of such grounds or a reasonable person would be.

Directors Can Shield Themselves From Personal Liability for Company Debts

The best protection a company director can have against being held liable for a company’s debts is to ensure that their assets have been protected by developing an asset protection strategy.

With proper legal advice, a company can be structured such that a director will not be ‘placed in the line of fire’ if the company becomes insolvent.

For some, this may be a little late given the ‘claw back’ provisions of the Corporations Act allowing liquidators to claw back 6 months’ worth of payments made by a company.

That means that the time to act is now.

Contact Us

For more information about force majeure provisions, contact us at Bambrick Legal today. We offer a free, no-obligation 15-min consultation for all enquiries.