The purpose of the Professional Practice Statements (PPSs) is to ensure Affiliates of the Affiliation for Business Resilience & Turnaround (ABRT), and all those who work for, represent or act on their behalf, maintain high professional standards at all times.
The PPSs set out guidance and suggested standards of practice for those engaged in the restructuring and turnaround of a business, and in the resolution of financial distress affecting a business or its stakeholders. They are intended to promote best-practice conduct that is aligned with prevailing statute, ethical frameworks and other relevant professional guidelines.
The PPSs describe required practice as a professional benchmark but are not statutory or legislative statements. They are not intended to prescribe a single mandatory approach or to operate as rigid rules. Affiliates are expected to exercise professional judgment, having regard to the specific circumstances, complexity and risk profile of each matter.
1 Trading Whilst Insolvent
1.1 Insolvency Threshold and Application
When an ABRT Affiliate (‘Affiliate’) provides advice to company directors, representatives or employees, it is frequently at a time when the company is in financial distress, insolvent or approaching insolvency.
Under section 588G of the Corporations Act 2001, the duty to prevent insolvent trading arises not only where a company is actually insolvent, but also where there are reasonable grounds for suspecting that it is insolvent or would become insolvent.
Section 95A of the Corporations Act 2001 provides that a company is insolvent if it is not solvent. A company is solvent only if it can pay all of its debts as and when they become due and payable.
1.2 Common Indicators of Financial Distress
Indicators that may give rise to reasonable grounds for suspecting insolvency include, without limitation:
- inability to pay debts as they fall due
- persistent late payment of creditors outside agreed terms
- difficulty paying employee wages, superannuation or employment-related taxes
- receipt of letters of demand or letters before action from creditors
- service of legal process in respect of unpaid debts
- sustained cash flow pressure or deterioration
- difficulty obtaining further trade credit or finance
An Affiliate should be alert to these indicators and warn directors of their significance, including the potential personal consequences of continued trading.
Such warnings must be given in writing and retained on the Client Case Record.
1.3 Director Exposure and Consequences
Directors face significant personal exposure if they allow a company to incur debts while insolvent.
Section 588G imposes personal liability where:
- the company is insolvent at the time a debt is incurred or becomes insolvent by incurring it, and
- the director knew, or a reasonable person in their position would have known, that there were reasonable grounds for suspecting insolvency
Consequences may include civil penalties, compensation orders, disqualification and, in certain circumstances, criminal liability.
Where directors increase company losses, section 199A(2) of the Corporations Act 2001 prevents the company from indemnifying directors for liabilities owed to the company.
An Affiliate must clearly warn directors of these risks and confirm the warning in writing.
1.4 Safe Harbour Context
Section 588GA of the Corporations Act 2001 provides a statutory safe harbour where directors, upon suspecting insolvency, develop and pursue one or more courses of action that are reasonably likely to lead to a better outcome for the company than immediate formal insolvency.
Where applicable, the Affiliate should explain the availability, scope and limitations of safe harbour protection and confirm that advice in writing. Detailed guidance is contained in PPS.5 – Director Safe Harbours.
2 Actions by Directors to Lessen Liability During the Hiatus Period
2.1 The Hiatus or Twilight Period
The period between recognising potential insolvency and entering formal restructuring, safe harbour or insolvency processes is a heightened risk phase.
During this hiatus period, directors are expected to act conservatively, preserve value and avoid conduct that worsens creditor outcomes.
The Affiliate should advise directors accordingly and document such advice.
2.2 Protective Measures Commonly Considered
Subject to the specific circumstances of the business, advice during this period may include consideration of the following measures:
Cash Only Trading
Avoid incurring further credit. Goods and services should be paid for contemporaneously. Restrict access to company funds, petty cash and payment cards.
No Dissipation of Assets
Do not dispose of assets other than in the ordinary course of business or where stock is perishable or wasting. Maintain accurate asset registers and records.
Asset Protection
Incur expenditure only where necessary to preserve or protect company assets for the benefit of creditors.
Customer Deposits
Avoid accepting deposits. Where unavoidable, deposits should be segregated and clearly identified as held on behalf of customers.
Payments to Creditors
Avoid selective payments to unsecured creditors that may constitute unfair preferences under section 588FA.
Suspension of Non-Essential Deliveries
Do not accept delivery of goods or services that are no longer required.
Set-Off Risks
Avoid transactions that facilitate set-off arrangements under section 553C where this may disadvantage other creditors.
Payment Cards
Suspend use of company-issued credit or charge cards by directors, employees and consultants.
Insurance
Ensure all assets remain adequately insured and premiums are paid.
Overdrawn Accounts
Exercise caution where bank accounts are overdrawn. Payments into such accounts may have unintended consequences.
Retention of Title Goods
Identify stock subject to retention of title claims registered on the PPSR. Segregate, inventory and insure such goods. Do not permit removal without proper process.
Liens
Do not dispatch goods via carriers owed money by the company, as lien rights may arise.
Employees and Confidentiality
Maintain necessary operational communication with employees. Where employees are informed of sensitive matters, require confidentiality and restrict media or social media engagement.
Governance and Minutes
All material decisions should be made at properly convened board meetings and minuted contemporaneously. Informal or undocumented decision-making should be avoided.
3 Executive and Officer Exposure – Creditor-Defeating Dispositions
3.1 Scope of Liability Beyond Directors
Liability for creditor-defeating dispositions is not confined to formally appointed directors.
Under section 588FDA of the Corporations Act 2001, civil and criminal liability may attach to a person who engages in, authorises, procures or is otherwise involved in a creditor-defeating disposition. The term “person” is not limited to directors and may extend to:
- company officers
- senior executives
- de facto or shadow directors
- managers or controllers
- advisers or other third parties involved in structuring, approving or implementing the transaction
3.2 Executive and Management Risk Factors
Executives and senior management may be exposed to liability even where they are not directors and even where a transaction is formally approved by the board, particularly where they are materially involved in:
- designing or structuring the transaction
- negotiating or approving asset transfers
- directing or implementing disposals
- suppressing or discouraging market testing or valuation
- facilitating transfers to related parties or NewCo structures
This risk is heightened where:
- the executive exercises real decision-making authority
- directors habitually follow the executive’s instructions
- contemporaneous records show the executive driving the transaction logic
- valuation, pricing or process deficiencies are known or ignored
3.3 Affiliate Obligations
Affiliates should warn both directors and senior executives that creditor-defeating disposition provisions carry personal exposure beyond the board, including potential criminal liability where dishonesty or recklessness is established.
Such warnings should be:
- given in writing
- framed in neutral, factual terms
- recorded on the Client Case Record
4 Role of the Affiliate
The Affiliate’s role during the hiatus period is advisory only. The Affiliate must not assume management control or give instructions.
Advice should be framed as guidance, confirmed in writing and accompanied by clear statements that decisions rest with directors and officers.
All advice, warnings and acknowledgements must be recorded and retained on the Client Case Record in accordance with PPS.3.
