The Australian Federal Government announced Sunday (22 March 2020) that it intends to make temporary amendments to insolvency and corporations laws in light of the challenges COVID-19 poses to many otherwise profitable and viable businesses.
In particular, the government intends to relieve directors from the risk of personal liability for insolvent trading, where the debts are incurred in the ordinary course of business.
In addition, the minimum threshold at which creditors can issue a statutory demand will increase from $2,000 to $20,000, and companies will have 6 months to respond to the statutory demand rather than the current 21 days. Other measures are also included in the proposal, details of which are set out below.
These measures will be welcome relief to corporate boards facing the uncertain impact of COV-19 on their business and cashflow position. We expect once implemented these measures will assist many companies to continue trading through the current period of disruption, rather than requiring them to appoint administrators due to solvency concerns.
The Australian Federal Government’s proposed changes come as part of a broader package of measures. The changes are intended to provide a safety net for Australian businesses facing financial difficulty as a result of the unique challenges posed by the country’s broader response to COVID-19, and lessen the threat of actions that could unnecessarily push them into insolvency and force the winding up of those businesses.
The Federal Government has stated that the proposed temporary measures will be as follows:
INSOLVENT TRADING (COMPANIES)
relieving directors from any personal liability for trading while insolvent in relation to debts incurred in the ordinary course of business (this will apply for 6 months);
however, the company will still be liable for the debts incurred and egregious cases of dishonesty and fraud will be subject to criminal penalties;
STATUTORY DEMANDS (COMPANIES)
increasing the threshold at which creditors can issue a statutory demand on a company from $2,000 to $20,000 (this will apply for 6 months);
allowing companies 6 months (rather than the current 21 days) to respond to statutory demands served on them (this will apply for 6 months);
BANKRUPTCY PROCEEDINGS (INDIVIDUALS)
increasing the threshold for a creditor to initiate bankruptcy proceedings against an individual from $5,000 to $20,000 for 6 months;
increasing the time period for debtors to respond to a bankruptcy notice (from 21 days to 6 months);
extending the period of protection a debtor receives after making a declaration of intention to present a debtor’s petition (from 21 days to 6 months);
TAX PAYMENTS AND ENFORCEMENT
the ATO will tailor solutions for businesses struggling due to COVID-19, including temporary reduction of payments or deferrals, and withholding enforcement actions including Director Penalty Notices and wind-ups; and
TEMPORARY POWERS GIVEN TO THE TREASURER
giving the Treasurer a temporary instrument-making power in the Corporations Act 2001 (Cth) (Corporations Act) to provide targeted relief for companies from certain provisions to deal with unforeseen events that arise as a result of the health crisis (for example due to social distancing).
These proposed changes do not yet have legal effect. Amendments to the Corporations Act and other legislation will be necessary to give effect to the interim measures set out above. No bill is available as yet, however we expect that the legislation will be introduced urgently (and potentially with some degree of retrospective application), which will become clearer once the legislation is available, and the Government will be working on achieving bipartisan support for the changes.
In the meantime, until these measures are brought into force, directors of companies under financial stress can seek to take advantage of the recently introduced safe harbour from insolvent trading, which can also help companies continue to trade when under financial pressure.
C&D’s independent and specialist restructuring team will continue to review the proposed changes and will provide further updates as additional information becomes available.
You can contact the C&D team on 1300 023 782 or email email@example.com for details on these changes, or to discuss how this will affect your specific circumstances.
The Treasurer’s media release can be found here.