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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 that 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.

 

In Other Words, 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.

 

There Are a Number of Ways That a Director Can Seek Sanctuary From Being Personally Liable for the Company’s Debts

 

The best protection a company director can have against being held liable for a company’s debts is to ensure that his or her 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’ in the event that the company becomes insolvent.

For some, this may be a little late given the ‘claw back’ provisions of the Corporations Act giving liquidators the opportunity 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:

You can also read more about our Insolvency services here.

Related Blog – My Business Is Run Under a Company Structure. Am I Protected From a Personal Attack?