Agony Uncle: Can we keep trading while ‘pandemic-ated’ and facing an insolvency risk?

In this help sheet series, Our Community’s resident agony uncle, Chris Borthwick, offers answers to frequently asked questions about issues not-for-profits are facing during the COVID-19 pandemic.

Agony Uncle consulted with Our Community’s legal partner, Moores, in answering this question.

Can we keep trading while ‘pandemic-ated’ and facing an insolvency risk?

Chris Borthwick, Our Community's thinker-in-residence

In the normal course of events, just about the biggest no-no for any organisation, whether it’s for-profit or not-for-profit, is trading while insolvent. If your organisation incurs debts that it has no prospect of paying, not only can the organisation itself go bankrupt but the board can be prosecuted or sued. Furthermore, board members themselves can be sued as individuals. For more information, see the overview of board members’ legal responsibilities here.

At Our Community we sometimes recommend taking a highly pragmatic approach to persnickety regulations, on the basis that nobody cares about your organisation’s internal machinations, not even the regulator. But when someone is facing the prospect of not getting paid, believe me, they care.

In ordinary boring old times, the prospect of getting sued is a valuable aid to keeping boards on the straight and narrow. This year has been many things, but it hasn’t been boring at all. Every day brings a new shock, which is very hard on your long-term planning processes. It’s very hard, in fact, to predict what your finances are going to be like in three months, or 12, or 18. You may have a quite satisfactory business model, but no income right now.

If anyone could put a date on when the pandemic and the lockdowns will all be over, you could create a budget and work out what you can and can’t expect to be able to pay for. But there’s no time limit on the crisis and there’s not much prospect of getting one for – well, three months, or 12, or 18.

This means that if the law was going to be enforced very strictly, or if you wanted to be absolutely safe, you’d have to shut your organisation down as soon as you looked like having a negative cash flow, whatever your basic soundness. Not only would this make you feel terrible, the government would hate it, too, as thousands of viable businesses that will one day start paying tax again would fold and make recovery much longer and bloodier.

So the Federal Government has passed an act that gives businesses (not-for-profits included)a lifeline. Companies have been told that any personal liability for directors for insolvent trading under certain circumstances has been suspended for six months. If you’re a charity, the ACNC, which also has rules against trading while insolvent, has also said it won’t come after you.

Infuriatingly, though, the Federal Government can only relieve the burden on companies, which come under federal legislation, not on incorporated assocations. If you’re an incorporated association, and most not-for-profits are, you come under state Associations Acts, and these haven’t followed the Feds and the ACNC.

As senior Moores leader Rebecca Lambert-Smith says, “While there is some relief for Victorian and Northern Territory associations, all associations should be aware of penalties that may apply in their own state or territory.”

Moores has outlined the provisions that apply to incorporated associations in each state and territory here.

I don’t think there’s any prospect that the states will want to get nasty during a national emergency, any more than the Feds do, but they haven’t formalised this position.

Mind you, having your organisation go into debt when you can’t be sure you’re going to be able to repay the money is unpleasant – not only because you may have personal liability, but also because it could be terminal for the organisation.

Basically, despite government measures, if your budget is in bad shape even after Jobkeeper, then you’re probably going to have to make tough decisions.

For starters, check out the finance resources available from Our Community:

And good luck.

#SaveOurSector
#

This article is just one of the ways the Our Community Group is working to support not-for-profits through the COVID-19 crisis, as part of a major campaign to help the not-for-profit sector to survive, re-invent and sustain.

Become a member