Temporary insolvency laws to provide relief

Laws are now operational from 24th March 2020 providing temporary measures to allow trading and reduce the risk of insolvency in the midst of the financial and economic distress brought on by COVID-19.

In announcing these unprecedented changes, the Government has tried to lessen the impact on directors of businesses:

“… to make sure that companies have confidence to continue to trade through the Coronavirus health crisis with the aim of returning to viability when the crisis has passed, directors will be temporarily relieved of their duty to prevent insolvent trading with respect to any debts incurred in the ordinary course of the company’s business. This will relieve the director of personal liability that would otherwise be associated with the insolvent trading. It will apply for six months…”.

The Coronavirus Economic Response Package Omnibus Bill 2020, having passed both Houses on 23rd March 2020 was effective from the date of royal assent (which was given on 24th March 2020).

A summary of the changes to the Corporations Act 2001 are as follows:

  1. a temporary increase of the debt threshold to issue a statutory demand from $2,000 to $20,000;
  2. a temporary increase of the debt threshold to issue a bankruptcy notice from $5,000 to $20,000;
  3. a temporary increase in the period for issuing a response to a statutory demand or bankruptcy notice from 21 days to 6 months;
  4. directors to be relieved of their duty to prevent insolvent trading and personal liability. Egregious cases of dishonesty and fraud will still be subject to criminal penalties. The recently enacted anti-phoenixing laws still apply.
    See here for our recent article on this: https://www.cornwalls.com.au/how-to-catch-a-phoenix-new-laws-to-combat-illegal-phoenixing/

Being proactive and acting early is the key to stemming the significant impacts of COVID-19. Seeking advice and understanding the key measures required to safeguard a business by engaging with key stakeholders such as banks, landlords, suppliers, the Tax Office and employees is critical.

Even with the temporary relief measures above, it may be important, given your business circumstances, to seek to call upon safe harbour protection provisions. The safe harbour provisions have been law since September 2017, and provide directors with a defence from personal liability for insolvent trading if, through a restructuring plan developed with advice from a qualified restructuring or turnaround advisor, it is reasonably likely to lead to a better outcome for the company than an insolvency appointment. There may be other measures also available such as a “holding DoCA” (a deed of company arrangement that essentially puts the company into a holding pattern with the agreement of a majority of creditors and allows for more time for a restructure to play out in this uncertain environment).

We have a dedicated team able to assist with the impact of COVID-19 including on business contracts, employees, tax obligations and assistance measures and protecting against personal and corporate insolvency.

Disclaimer

This article is general commentary on a topical issue and does not constitute legal advice. If you are concerned about any topics covered in this article, we recommend that you seek legal advice.

The Authors

Radika Kanhai

PARTNER, MELBOURNE

Jarrod Munro

PARTNER, MELBOURNE

Key Contacts

Radika Kanhai

PARTNER, MELBOURNE

Andrew Sutherland

PARTNER, SYDNEY

Paul Agnew

PARTNER, BRISBANE