The Connection to Debts

What the Legislation Says

Section 588GA contains specific provisions dealing with debts incurred during the relevant period.

Under the current legislation, the section can apply to a debt incurred during that period where the debt is incurred directly or indirectly in connection with the relevant course of action, or in the ordinary course of the company’s business, subject to the other requirements and limitations of the section.

That distinction matters.

The application of section 588GA to particular debts and circumstances can involve legal questions, and appropriate legal advice should be obtained where required.

Our Approach to Spending Is Deliberately Stricter

The legal test and our management discipline are not the same thing.

Even where an expense may be incurred in the ordinary course of business, we still want the director to ask:

A business experiencing financial pressure cannot afford to allow cash to disappear simply because an expense has always been incurred.

We want expenditure to be understood, challenged and controlled.

That means asking practical questions:

• Do we need it?
• What does it contribute to the business?
• Can we afford it?
• Is there a better alternative?
• Does it support the course we are pursuing?
• What happens to cash if we make this commitment?

This is not our interpretation of the legal test. It is financial discipline.

Every Dollar Matters

Once a business is under pressure, apparently small financial decisions can become significant when repeated.

We therefore pay particular attention to areas such as:

• unnecessary or poorly timed asset purchases;
• excessive or uncontrolled director drawings;
• stock being purchased without sufficient demand;
• subscriptions and services that no longer provide value;
• finance commitments and expensive short-term lending;
• expenditure that has continued simply because “we have always done it”; and
• costs that cannot be justified by the current needs and financial capacity of the business.

The purpose is not simply to stop spending. A business still needs to operate.

It may need materials, employees, vehicles, equipment, professional services, insurance, premises and many other expenses to generate revenue and continue its operations.

The objective is to make spending deliberate rather than automatic.

Make a Prisoner of Every Dollar

This is one of the disciplines we bring to a business under financial pressure.

• Know where it came from.
• Know where it is going.
• Know why it is being spent.
• And understand what effect that decision has on the company’s cash position.

That discipline is valuable regardless of the legal treatment of a particular debt.

It creates better visibility, better decisions and greater accountability.

Spending Must Be Seen in the Whole Business

We also do not assess expenditure in isolation.

That is why we look at expenditure alongside cash flow, profitability, debtors, creditors, taxation obligations, employee entitlements, finance commitments and the actions being pursued to improve the company.

The Distinction Matters

Safe Harbour is governed by the requirements of section 588GA and the circumstances of the particular company and director.

Our spending discipline does not determine whether a particular debt falls within Safe Harbour. What it does is help the director manage a business under financial pressure with greater visibility and control.

And in a business where cash is tight, that commercial discipline matters enormously.

Every dollar should have a purpose — not because that is the legal test for every debt, but because that is how a financially disciplined business should be run.