Temporary changes to insolvency laws to support businesses

In case you missed it, one of the first measures the Federal Government announced in response to COVID-19 was temporary changes to insolvent trading provisions, statutory demands, and bankruptcy. These temporary measures were passed in the Coronavirus Economic Response Package Omnibus Act 2020 (Cth) on 25 March 2020.

These changes are a timely reminder for directors to consider their directors’ duties under the Corporations Act 2001 (Cth) (the Act) and the safe harbour provisions available to them.

This article summarises some of the temporary changes that directors should be aware of.

6 month relief from insolvent trading

For 6 months from 25 March 2020, directors are relieved from their duty to prevent a company from trading while insolvent in respect of debts incurred in the ordinary course of carrying on its business. Ordinary course of business refers to any debt “necessary to facilitate the continuation of the business”.

This temporary relief means that during this time, directors will not become personally liable for permitting an organisation to trade while insolvent. Please note, that this relief only operates where debts are incurred in the ordinary course of business and will not apply where dishonesty and fraud are involved.

Directors should be aware that the temporary measures do not affect other directors’ duties, which continue to apply.  Accordingly, directors still need to ensure they consider the interests of creditors in their decision-making if they are to avoid alternative claims for breaches of directors’ duties in the event of a subsequent corporate insolvency.

Beyond the 6 month timeframe that the temporary measures are in place (until 25 September 2020), directors can seek to utilise the existing safe harbour provisions in section 588GA of the Act. To fall within the existing provisions, directors need to be developing and taking a course of action that is reasonably likely to lead to a better outcome for the company, than an immediate appointment of an administrator or liquidator.

Temporary increase in thresholds and time to comply

The Federal Government has also made changes to thresholds and time to comply with statutory demands and bankruptcy notices as follows:

Statutory demands: The minimum debt for a statutory demand is $20,000 instead of $2,000. The time for a debtor company to comply with a statutory demand is now 6 months instead of 21 days.

Bankruptcy notices: The statutory minimum for bankruptcy is now $20,000 instead of $5,000. The time for compliance with a bankruptcy notice is now 6 months instead of 21 days.

These changes apply to statutory demands and bankruptcy notices that are served on or after 25 March 2020. The time for compliance for statutory demands and bankruptcy notices issued before 25 March 2020 is still 21 days.

More information

If you have any queries or would like further information about this article, please contact:

Justin Hill
Principal
M: 0418 578 701
E: jhill@pageseager.com.au

Brett Cassidy
Principal
M: 0438 368 053
E: bcassidy@pageseager.com.au

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