With Commonwealth funding to Medicare Locals ceasing on 30 June 2015, now is the time for Boards of Medicare Locals to ensure that they are, and remain, solvent, now that a substantial part of their revenue flow is being terminated.
Boards of Medicare Locals will wish to ensure that revenue expected over the remaining 9 months will adequately cover all known expenses and liabilities, to the point where funding ends. Some Medicare Locals may have already entered into leases, contracts and other commitments that extend beyond 30 June 2015. If they were dependent on continued government funding, there is a substantial risk of insolvency. Medicare Locals should also factor in the costs of wind-down, including termination and redundancy of staff, which will be in excess of ordinary recurrent expenditure up to 30 June 2015. If a Medicare Local does not have sufficient reserves to cover all of these costs, then it raises the question of insolvency now.
The Commonwealth government has given some form of assurance that some “unavoidable legal commitments properly incurred” will be met. To some extent, this commitment goes no further than the existing provisions contained in the Deed for Funding between the Commonwealth and Medicare Locals and it lacks clarity and certainty. Certainly more definitive assurances should be sought from the Commonwealth where there is a risk of insolvency now or in the near future.
Directors of companies, including the Boards of Medicare Locals, have an obligation to ensure that the company does not continue when insolvent. Directors can be personally liable for debts incurred after a point at which a company is technically insolvent.
The Corporations Act imposes a duty on directors in relation to debts incurred when a company is insolvent and:
- there were reasonable grounds to suspect insolvency,
- the director was actually aware of the existence of reasonable grounds to suspect insolvency, or
- a reasonable person could have been so aware.
Where a director does not believe that a company can pay its debts as and when they fall due, whether now or in the future, the risk of insolvency arises.
Whilst the Commonwealth has acknowledged that there may be commitments not adequately matched by funding revenue to 30 June 2015, it has not absolutely guaranteed that it will meet all of those obligations. Whilst it has given these assurances, to deal with the potential insolvency of Medicare Locals, there is an urgent need for any Medicare Local to satisfy itself now that it is solvent now, given the decision by the Commonwealth to cease funding.
Boards of Medicare Locals should, therefore, seek advice and assurances:
- seek legal advice in relation to their individual position, both for the organisation and for individual directors;
- seek appropriate financial assurance, either internally or externally by accountants, that projected revenue and expenses are matched, and that eventual costs after Commonwealth funding ceases, can still be met, either out of further revenue from other sources, from reserves or otherwise; and
- each Medicare Local should seek more formal assurances from the Commonwealth (which may not be forthcoming for some time) in relation to the actual commitments they will have once funding has ceased.
Whilst correspondence from the Commonwealth Department is designed to provide “assurance”, it does not adequately meet the threshold test required at law to provide directors with certainty and clarity that all debts will be met. It may not, therefore, be reasonable to simply rely on the Commonwealth’s assurance where there is a risk of insolvency, either now or in the future, and the Commonwealth will need to provide stronger assurance in order to avoid the question of insolvency arising.
Boards who simply wait until 30 June 2015 to “see what happens” run the risk that a reasonable review of the situation would determine that insolvency occurred some time earlier, and that therefore individual directors are personally liable for debts incurred after the date on which insolvency arose some time before.
It is therefore appropriate for Medicare Local Boards to consider their position now. Appropriate legal and financial advice should be sought to consider these issues where there is a risk.