The Federal Government has announced a package of changes to Australian insolvency and bankruptcy laws to provide some relief to businesses and individuals who may face financial distress from the economic impacts of COVID-19.
The package is expressed to provide a safety net to ensure that when the crisis has passed, profitable and viable businesses can resume normal operations. This is in the form of changes to the Corporations Act to provide temporary relief to assist companies to manage through the current economic climate.
Importantly though, the changes do not change parties’ contractual rights.
We provide a summary of the intended changes to the Corporations Act, and of the further potential claims that should still be considered by companies.
The essential elements of the package are:
- A temporary increase in the threshold at which creditors can issue a statutory demand on a company, or a bankruptcy notice on an individual, from $2000 to $20,000. This will apply for six months.
- An increase in the time that companies and individuals have to comply with a statutory demand or bankruptcy notice, from 21 days to six months.
- 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. The relief for directors from personal liability that would otherwise be associated with insolvent trading will apply for six months.
- The ATO will tailor solutions for businesses struggling due to COVID-19, including a temporary reduction of payments or deferrals, or withholding enforcement actions such as wind ups.
- The Treasurer will be given a temporary instrument-making power under the Act to temporarily amend provisions of the Act to provide relief from specific obligations and to enable compliance with legal requirements during the crisis. The instrument-making power will apply for six months and any instrument made under this power will apply for six months from the date it is made.
Directors continue to have recourse to ‘safe harbour’ under the Corporations Act which relieves a director from liability for insolvent trading. See our article here for further information on safe harbour.
The government is moving quickly to implement this package, and the Bills will be introduced to Parliament today (23 March 2020) for urgent consideration. Subject to the Bills passing through Parliament, the government will then move to immediately make and register supporting instruments.
These changes will reduce the threat of creditors forcing otherwise profitable companies into insolvency and individuals into bankruptcy through the statutory demand/bankruptcy regime.
However, it will not change parties’ contractual powers to enforce their claims, for example:
- landlords taking possession of property for unpaid rent; or
- suppliers repossessing unpaid plant and equipment/stock.
When considering strategies during this time, it is important that companies consider all potential avenues for enforcement that could be used by them (as a creditor), or against them (as the company).
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