COVID-19: Temporary changes to insolvency laws.

28 April 2020 | Reading time: 2 minutes

In recognition of the financial hardships faced by Australian businesses over the upcoming months, the Australian Government has enacted the Coronavirus Economic Response Package Omnibus Act 2020 (CERP Legislation) to provide:

  • flexibility in the application of the Corporations Act 2001 (Cth) (Corporations Act); and
  • temporary relief for financially distressed individuals and businesses.

Duration of temporary measures.

These temporary measures are intended to apply for 6 months from 25 March 2020 (or any longer period that is subsequently prescribed). This will hopefully avoid a potentially unprecedented wave of insolvencies.

Key amendments for businesses.

The CERP Legislation has introduced the following key measures:

1. Statutory demand.

  • As discussed in our previous blog, a company will be presumed to be insolvent and could be wound up if it does not respond to a statutory demand within 21 days.
  • Under the new temporary measures, statutory demands issued from 25 March 2020 must now be for more than $20,000 (instead of the previous minimum of $2,000).
  • In addition, they must allow 6 months for the company to respond to the statutory demand (instead of the previous 21 days).
  • These measures essentially freeze the ability of creditors to commence proceedings to wind up a company for a period of 6 months until 24 September 2020.

2. No personal liability for directors.

  • Ordinarily, company directors have a duty to ensure their company does not trade while insolvent.
  • A director of a company can be personally liable for the debt and can face criminal and civil penalties, if the company trades while insolvent.
  • The CERP Legislation has introduced a new temporary ‘safe harbour’ provision in the Corporations Act. This provides directors with temporary relief for a period of 6 months from personal liability for trading while insolvent.
  • A director can rely on the new provision if the debt is incurred within the 6-month period commencing 25 March 2020 and the debt is necessary to facilitate the continuation of the business.
  • The director seeking to rely on the temporary safe harbour relief bears the evidentiary burden in establishing they are entitled to the relief.

Welcome relief for distressed businesses.

COVID-19 is creating uncertain impact on businesses and cashflow positions. These relief measures will be a welcome relief to distressed corporate boards.

Impact on suppliers and debt recovery.

On the other hand, these temporary relief provisions will impact on creditors who would ordinarily rely on the statutory demand process as a debt enforcement tool.

Creditors and suppliers should therefore consider their options for debt recovery in the current environment. They can continue to pursue debtors through the courts to obtain judgment. However, a more immediate measure will be for suppliers to be more vigilant with their trading counterparties and consider adjusting their trading terms to address this risk.

For details of all of our COVID-19 tips and updates, visit the Bespoke COVID-19 Hub.