While there is some relief for Victoria and Northern Territory associations, all associations should be aware of penalties that may apply in their own State or Territory. Registered charities will benefit from the ACNC’s announcement of an aligned approach to interpreting Governance Standard duties.
The temporary coronavirus insolvency safe harbor offers some protection to directors of corporations in respect of debts incurred by companies that are or become insolvent in the next six months (this period may be extended). Provided debts are incurred honestly and in the course of ordinary business, directors will be protected from civil penalties (of up to $200,000) and personal liability to compensate creditors or the company from losses arising from trading while insolvent. The protections apply to directors of both for-profit and not-for-profit corporations.
Incorporated associations are separately regulated in each State and Territory of Australia. This means that the extent to which the Corporations Act duty to prevent insolvent trading applies differs in each State and Territory. For the purposes of the temporary coronavirus insolvency safe harbor, the key differences are as follows:
Victoria
The temporary coronavirus insolvency safe harbor provisions do apply to Committee members – they are protected from the civil penalty for trading while insolvent and from liability to compensate creditors or the association for losses in the next six months.
Northern Territory
The temporary coronavirus insolvency safe harbor provisions do apply to Committee members – they are protected from the Corporations Act civil penalty for trading while insolvent and from liability to compensate creditors or the association for losses in the next six months.
However, there is no protection from the separate offence in the Associations Act 2003 (NT) of incurring debts not likely to be paid (maximum penalty $62,800 or two years)
New South Wales
The Corporations Act duty to prevent insolvent trading does not apply to New South Wales associations.
There is a separate offence under the Associations Incorporation Act 2009 (NSW) of incurring debts while insolvent (or that cause the association to become insolvent). A maximum penalty of $8,000 or one year’s imprisonment applies.
South Australia
The Corporations Act duty to prevent insolvent trading does not apply to South Australian associations.
There is a separate offence under the Associations Incorporation Act 1985 (SA) of incurring debts while insolvent (or that cause the association to become insolvent). A maximum penalty of $5,000 applies.
Western Australia
The Corporations Act duty to prevent insolvent trading does not apply to Western Australian associations.
There is a separate offence under the Associations Incorporation Act 2015 of incurring debts while insolvent (or that cause the association to become insolvent). A maximum penalty of $5,000 applies.
Queensland, Tasmania and ACT
The Corporations Act duty to prevent insolvent trading does not apply in these jurisdictions.
There is no separate offence of incurring debts while insolvent.
How we can help
The Australian Charities and Not-for-profits Commission has advised that it will align its interpretation of the Governance Standard duties (which includes a duty “not to allow the charity to operate while it is insolvent”) for all charities with the insolvency safe harbour provisions.
This means a charitable association will not be in breach of the ACNC Governance Standards if it trades insolvent between now and 25 September 2020, provided it:
- ensures that its directors are aware of the issue and have an achievable aim for their charity to return to viability when the COVID-19 crisis has passed, and
- informs its members and the ACNC if it is trading insolvent.
For further assistance or guidance on any of the matters above, please do not hesitate to contact us.
For more information regarding changes to Insolvent Trading Duties for Directors, please read our article here.