An insolvency firm is warning brokers that small business owners looking for finance are becoming more and more likely to break the law.
The group, Jirsch Sutherland, said with the property downturn and possible negative gearing changes, directors need to be protected by Safe Harbour regulations.
Alongside uncertainty in the residential property market, company partner Ginette Muller said a credit squeeze or crunch was coming.
She said, “The current property climate is weighing heavily on anyone who either owns, or aspires to own, real estate.
“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.”
The group said that owners faced with a credit squeeze often turn to solutions like repayment arrangements with the ATO, use other creditors by stretching out terms, selling surplus business assets, reducing overheads and streamlining staff.
Muller said this could lead many to trade while insolvent. She added, “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.”
Safe Harbour was introduced in 2017 and is progressively being used as an insurance policy by directors in a bid to minimize the risk of breaching directors’ duties.
Directors are advised to seek Safe Harbour protection prior to negotiating repayment terms.
“Safe Harbour protection is confidential and is not expensive as the director and senior staff remain in control,” Muller said.
“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.”