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Temporary Insolvency Changes

Corporate News - 26 March 2020

On 24 March 2020, the Federal Government’s Coronavirus Economic Response Package Omnibus Act 2020 came into force. The aim of this legislation is to provide a safety net to businesses as they deal with the effects of Coronavirus and to put them in the best position possible to return to financial viability after the outbreak has passed.

The legislative changes are as follows:

1.  Changes to statutory demands made by creditors
Increase in:

  • the minimum amount for which a creditor can make a statutory demand to a debtor from $2,000 to $20,000; and
  • the response time for a debtor responding to a statutory demand from 21 days to 6 months.

These changes will only apply to statutory demands served on or after 25 March 2020 and the changes will apply until 25 September 2020.

2.   Individual bankruptcy
Raising of the minimum debt that allows a creditor to initiate bankruptcy proceedings against an individual debtor from $5,000 to $20,000.

An individual will now have 6 months, rather than 21 days, to respond upon receipt of a bankruptcy notice from a debtor.

Similar to the changes to statutory demands, these changes will only apply to bankruptcy notices issued on or after 25 March 2020 and the changes are designed to apply until 25 September 2020.
Further, an individual who applies for voluntary bankruptcy will have a six-month period, rather than the previous 21 days, in which unsecured creditors are unable to take further action against the individual. This change is also intended to apply until 25 September 2020.

3.  Protection for director’s personal liability for trading while insolvent
Until 25 September 2020, a new section 588GAAA has been inserted in the Corporations Act 2001 (Cth) (Corporations Act) pursuant to which directors will not be held personally liable on account of their company continuing to trade whilst insolvent, where debts are incurred in the ordinary course of the company’s business and during the six-month period from 25 March 2020 to 25 September 2020 (or longer if prescribed by the Government).

This change will not protect directors if debts are incurred dishonestly or fraudulently during this period and they will still be criminally liable. Directors still need to comply with all other duties required of them (e.g. their fiduciary duties and the duty of "care and diligence") during this period.

4.  Treasurer’s power to make instruments
The Treasurer will be granted a temporary instrument-making power in the Corporations Act to temporarily amend provisions of the Act to allow compliance during the Coronavirus crisis. This power will last until 25 September 2020 and any instruments made by the Treasurer will apply for 6 months from the date the instrument is made.

Effects
These changes do not remove the ability of creditors to enforce their debts, as creditors may pursue debts through the court system. Further, these changes will likely only effect unsecured creditors and secured creditors will proceed as is. With this in mind, suppliers should assess their terms of trade as with these temporary measures in place debtors may have less incentive to make payments on time.

Directors will still need to consider whether debts are being incurred in the “ordinary course of business”. In what is universally acknowledged to be unprecedented circumstances, this concept may be significantly broader than previously envisaged. Directors and officers must also continue to assess their company’s financial position in a proactive manner and, where required, seek advice from experienced advisers promptly. Even with the six-month temporary relief from insolvent trading liability, companies which trade without a properly considered and formulated recovery plan risk putting themselves in a hazardous position once the period of temporary relief ends.

These measures were a part of the second round of the Government’s economic response to Coronavirus with the Government flagging that, given the evolving nature of the crisis, it is likely additional measures will be required.

Please contact us in our Perth office on +61 8 9321 4000 or our Melbourne office on +61 3 9111 9400 if you have any queries or if you would like further advice on any of these requirements.  We look forward to working with you in 2020!

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