This article appeared in the May 2018 issue of Club Life.
Last issue we wrote about a case, Mansfield v Townend [2017] NSWDC 370, in which a liquidator commenced proceedings against a club director for approximately $190,000 worth of debt incurred whilst the Club was trading insolvent. In that instance, the director was extremely fortunate. However, regardless of the result in that particular case, it is a situation that no director wants to find themselves in.
So how can you manage your risk when it comes to liability for insolvent trading?
Be informed
If you are a director, you have an obligation to understand the club’s financials. If there is something you don’t understand then ask; demand answers; seek further training and, ultimately, if anything is still unclear, demand the club gets professional advice. If the financials don’t look good, you need to take urgent action.
Consider an administrator
If the Club is unable to pay its debts as and when they fall due, or is likely to be in that position, the safest course to protect yourself as a director is to convince your fellow directors to appoint an administrator. Once an administrator is appointed directors are no longer liable for debts incurred by the club on and from the appointment. Furthermore, a moratorium is imposed on the club’s debts (usually 30 days) and court proceedings cannot be commenced or continued (without consent of the administrator or leave of the court). This can give the Club valuable breathing room.
Act quickly
To appoint an administrator a club must apply for, and receive, approval of the Independent Liquor & Gaming Authority (Authority) (pursuant to section 41(1)(b) of the Registered Clubs Act (RCA)). This is even more reason for directors to act urgently when they suspect their club may be at risk of approaching insolvency.
In a recent decision of the Supreme Court of NSW, Belmont Sportsmans Club Co-operative Limited & Ors [2018] NSWSC 2, Justice Black considered a club’s application to appoint an administrator made pursuant to section 41(1)(a) of the RCA. The Club, and the proposed administrators, applied to the Supreme Court (and not the Authority) as one of the proposed administrators stated he had been informed that the Authority would not be able to approve his appointment until an Authority Board meeting (which due to the Christmas/New Year season would be in nearly 8 weeks’ time). Justice Black “hoped that the Authority’s position (was) not, in fact, that which was communicated to the Court”.
Justice Black was satisfied that the directors could properly form an opinion that the Club was insolvent (or was likely to become insolvent) for the purposes of the Corporations Act so as to appoint an administrator. However, Justice Black determined that the Court did not in fact have the power to approve the appointment of an administrator under section 41(1)(a) of the RCA. His honour recognised this as an “unsatisfactory result, at least if the Authority does not promptly consider (such) application(s)”.
Hopefully, this decision will lead to the Authority considering applications to approve the appointment of an administrator more urgently as, Justice Black observed, the “difficulty could generally be avoided by the Authority reaching prompt decisions whether to approve such appointments where they are genuinely urgent, as will often be the case”.
Our experience has been that the Authority does act reasonably promptly on such applications. However, it is critical that directors act quickly to seek approval of the Authority and then seek to appoint the approved administrator (or consider other potential courses of action such as the “safe harbour provisions”).
Can club directors sail into safe harbour?
All directors should be aware of the new “safe harbour” provisions in section 588GA of the Corporations Act which can protect directors from personal liability for insolvent trading.
Before the safe harbour provisions were introduced, there was no defence for directors who realised that their company was facing financial difficulty but then incurred expenses in trying to “turn the company around”.
The safe harbour provisions go some way to rectifying this issue. The provisions are not a “defence” but rather are an exception to a director’s civil liability for insolvent trading. Therefore, a liquidator will need to consider the potential application of the safe harbour provisions prior to commencing proceedings against a director for insolvent trading.
Under the safe harbour provisions, section 588G(2) of the Corporations Act (which provides for civil liability for insolvent trading) will not apply to directors if:
- at the time a director suspected the Club was insolvent;
- the director develops (or starts to develop) one or more courses of action;
- the course of action(s) is reasonably likely to lead to a better outcome for the club (than appointing an administrator); and
- the debt is incurred in connection with that course of action.
What may be an appropriate course of action will differ for each club. For example, a course of action could be a matter such as an amalgamation or sale or lease of the club’s land or changes to the club’s gaming offering. Any such course of action will require advice from an “appropriately qualified entity” giving specific advice to the club in its current circumstances.
There are a number of other matters that may be considered in determining whether a course of action is likely to lead to a “better outcome”. These include whether directors are properly informing themselves of the club’s financial position and taking appropriate steps to ensure that the club is keeping appropriate financial records. A director may also need to take appropriate steps to prevent any misconduct by directors or employees where that conduct could adversely affect the Club’s ability to pay its debts.
Safe harbour allows the directors some time to assess the benefits of the courses of action and obtain any necessary advice.
However, all directors must be aware that the safe harbour protections will not extend to a director in circumstances where the club has failed to:
- maintain proper financial records;
- pay employee entitlements (including superannuation) when they fall due;
- file documents as required by taxation laws; or
- provide access to the company’s books to a liquidator (if and when required).
While the safe harbour provisions may be a useful tool for directors who believe they can “turn the club around”, the key factor for a director to successfully be protected is to ensure that they seek appropriate advice early.
For more information contact Bruce Gotterson at b.gotterson@pigott.com.au or Daniel Fleming at d.fleming@pigott.com.au or call 02 8251 7777.
This article is intended to provide general information in summary form on a legal topic, current at the time of publication. The contents do not constitute legal advice and should not be relied on as such. Formal legal advice should be sought in specific circumstances.
Prepared by Bruce Gotterson and Daniel Fleming