Welcome Relief For Companies And Directors During COVID-19
Following the wide-ranging economic impact of COVID-19, the Australian Federal Government has passed temporary amendments to insolvency, bankruptcy and corporations laws to provide relief for businesses.
Changes made in Schedule 12 of the Coronavirus Economic Response Package Omnibus Act 2020 (Cth) (the Act), are intended as a safeguard to avoid unnecessary insolvencies and bankruptcies of otherwise profitable businesses during this difficult period. The following temporary amendments are in force for a six-month period starting on 25 March 2020.
Statutory Demands
Previously, the minimum debt for a statutory demand was $2,000. New regulation 5.4.01AA(1) of the Corporations Regulations 2001 now provides temporarily that the minimum debt is $20,000.
Previously, the statutory period of payment of a debt under a statutory demand was 21 days. New regulation 5.4.01AA(2) of the Corporations Regulations 2001 now provides temporarily, that the statutory period of payment of a debt is six months months.
These changes apply for six months from 25 March 2020.
The likely impact of these temporary amendments will be a reduction in creditors’ use of statutory demands to force companies to make payment of debts.
Bankruptcy Notices
Previously, the statutory minimum for a bankruptcy notice was $5,000. New regulation 4.02AA(1) of the Bankruptcy Regulations 1996 now provides temporarily, that the statutory minimum is $20,000.
Previously, the statutory period of payment of a debt under a bankruptcy notice was 21 days. New regulation 4.02AA(12) of the Bankruptcy Regulations 1996 now provides temporarily, that the statutory period of payment of a debt is six months.
These changes apply for six months from 25 March 2020.
Insolvent Trading Provisions
Section 588G(1) of the Corporations Act 2001 provides that directors have a duty to prevent insolvent trading by a company. The temporary amendments contained in section 588GAAA of the Corporations Act 2001 exclude directors from personal liability for debts incurred when trading while insolvent where the debt is incurred:
in the ordinary course of the company’s business;
during the six-month period starting on 25 March 2020 (or any longer period prescribed by regulations); and
before any appointment during this period of an administrator or liquidator.
To rely on the temporary safe harbour provisions in the Corporations Act 2001, the director bears the evidential burden of proving the operation of section 588AAA of the Corporations Act 2001.
Although providing relief to company directors for the consequences of insolvent trading, the company will continue to remain liable for debts incurred.
These changes apply for six months from 25 March 2020.
Effect of the Temporary Amendments
The temporary measures will provide relief to companies and directors facing the uncertain economic landscape brought about by COVID-19 and the impact on their businesses and cashflow and will assist many companies to continue trading.
However, these temporary amendments may make it increasingly difficult for creditors to recover outstanding debts. Creditors should be mindful of reviewing their agreements with companies to address the uncertainty brought about by COVID-19.
If you require assistance in relation to the Coronavirus Economic Response Package Omnibus Act 2020, please contact Urban Lawyers today.