Marsh Maher Richmond Bennison Lawyers

divider

Temporary Changes to Insolvency Laws Announced to Respond to COVID-19 – Effective from 25 March 2020

/ 0 Comments /

Temporary Changes to Insolvency Laws Announced to Respond to COVID-19 – Effective from 25 March 2020

Introduction

The Commonwealth Government has announced temporary amendments to insolvency and bankruptcy legislation in response to the unique challenges facing businesses and individuals during the Coronavirus health crisis. The changes provide bankruptcy and insolvency relief and are made pursuant to the Coronavirus Economic Response Package Omnibus Bill 2020 (Cth).

The temporary relief will operate for a period of 6 months commencing 25 March 2020 (“Commencement Date”). They provide a lifeline to individuals and companies facing financial distress during this period.

Statutory Demands (Companies) and Bankruptcy Notices (Individuals)

  • The threshold at which creditors may issue a statutory demand has increased from $2,000 to $20,000;
  • The time period to comply with a statutory demand has increased from 21 days to 6 months;
  • The threshold for a creditor to issue a bankruptcy notice against an individual has increased from $5,000 to $20,000; and
  • The time period to comply with a bankruptcy notice has increased from 21 days to 6 months.

Further, an individual debtor who is facing bankruptcy may elect to apply for bankruptcy by way of a debtor’s petition. The current laws provide that unsecured creditors are precluded from taking action against the debtor in those circumstances for 21 days, to allow the debtor some breathing space. The amendments extend this period from 21 days to 6 months.

There is no change to the voluntary administration process at this time.

Insolvent Trading

The amendments provide a temporary relief for directors for personal liability for insolvent trading, where the debt is incurred:

  • in the ordinary course of the company’s business;
  • during the six month period starting on the Commencements Date or any longer period prescribed by regulations; and
  • before any appointment during this period of an administrator or liquidator.

Debts incurred in the ordinary course during the Coronavirus health crisis may include, for example:

  • Debts to pay employees;
  • Loans to move business operations online.

These provisions supplement the existing safe harbour provisions in the Act.

A director will remain liable for insolvent trading that occurred before the amendments became effective. Further, directors may still face criminal penalties if debts are incurred dishonestly or fraudulently during this period.

Temporary powers given to the Treasurer

The Treasurer will be given a temporary instrument-making power to temporarily amend provisions of the Act. The purpose of this is to accelerate the Commonwealth Government’s response in relation to insolvency laws without the need to pass further legislation.

We anticipate this power to be used to amend requirements relating to statutory obligations which are impracticable in the current situation (such as requirements to hold meetings in person and other procedural matters).

Any instrument the Treasurer makes will apply for up to 6 months from the Commencement Date.

Other methods of winding up and enforcement 

The changes do not affect the ability of creditors to commence proceedings in Court or enforce their debts by other means (such as by way of attachment of debts or issuing a warrant to seize property). This is subject to Court hearing, procedural changes and availability which has also been significantly impacted.

The changes also do not impact other methods of winding up, including where winding up is sought by ASIC or the winding up by the court where it is demonstrated that the company is unable to pay its debts or on just and equitable grounds. For example, in some cases courts will make winding up orders in the context of a shareholders dispute where there is a management deadlock or a breakdown in trust and confidence between shareholders, or where there has been fraud or mismanagement in the conduct of a company’s affairs.

Key takeaways

The underlying purpose of the legislation is to provide individuals and businesses with the opportunity to continue to operate during these unprecedented times.

It is likely that the changes will result in a reduction of statutory demands and bankruptcy notices being issued as debt recovery mechanisms over the next 6 months.

Further, creditors should be aware that there may be an increased risk of payments being received by creditors subsequently being set aside as voidable preferences if the payer is insolvent but is temporarily relying on the reforms to continue to operate. We expect that creditors will more frequently be requiring payment upfront as a result.

Of course, directors still need to be mindful of, and fully understand, their obligations to avoid insolvent trading and of their obligations to protect themselves and their business during this period.

MMRB has a specialist team dedicated to insolvency, restructuring and debt recovery. If you wish to learn more about these changes, please contact Paul Marsh or Annabel Clarke on (03) 9604 9400.

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.

 

separator