COVID-19 response - six month suspension of insolvency laws

3 minute read  07.09.2020 Michael Hughes

The Government has implemented significant temporary measures to ensure that our insolvency laws and processes do not expose companies and individuals to undue risk. This will hopefully avoid a potentially unprecedented wave of insolvencies.

Key takeouts

  • The Government announced a six month suspension of insolvent trading laws.
  • The relevant debts will still be due and payable by the company in the normal way.
  • Egregious cases of dishonesty and fraud will still be subject to criminal penalties.

The new temporary measures are effective from 25 March 2020. On 7 September 2020, the Government announced an extension of these measures until 31 December 2020.

The Government announced a new temporary COVID-19 safe harbour defence for directors from civil insolvent trading liability (s 588GAAA of the Corporations Act 2001 (Cth) (Act)) – which can make directors personally liable for debts incurred when they should have suspected their company to be insolvent – so as not to apply to debts incurred during a period of at least six months from 25 March 2020 to 31 December 2020 in the 'ordinary course of the company’s business'. The debts must be incurred in the 'ordinary course' of the company's business, that is, necessary to facilitate the continuation of the business during the COVID-19 safe harbour period. This includes, for example, a director taking out a loan to move some business operations online, and debts incurred through continuing to pay employees during the COVID-19 pandemic. Egregious cases of dishonesty and fraud will still be subject to criminal penalties. The relevant debts will still be due and payable by the company in the normal way. For debts incurred outside the ordinary course of business, directors will still need the support of the 2017 safe harbour defence (s 588GA of the Act).

A curtailment of debt recovery action through the use of statutory demands and bankruptcy notices. The period for compliance with these will be extended from 3 weeks to 6 months. The minimum debt to which these processes can apply will be increased to $20,000, up from the $2,000 in the case of statutory demands and $5,000 for bankruptcy notices. Again these arrangements will apply until 31 December 2020.

It is made very clear that this is not a moratorium on normal debt recovery processes: 'creditors, many of whom are themselves small businesses, will still have the right to enforce debt against companies or individuals through the courts'. Nor will these arrangements operate as a limitation on the exercise of other contractual rights available to a creditor – which may, for example, include the right to charge default interest, the right to terminate a contractual relationship, the right to retake possession of certain assets in the possession of the debtor or, in some cases, the right to appoint a receiver over the business and property of the debtor.

Companies that are currently struggling due to Coronavirus should also be placed under less pressure from the ATO who will 'tailor solutions for their circumstances, including temporary reduction of payments or deferrals, or withholding enforcement actions including Director Penalty Notices and wind-ups'.

At present only the Australian Securities and Investments Commission has the power to offer relief from compliance with provisions of the Corporations Act, 2001 (Cth) Act or the Corporations Regulations 2001 (Cth) (Regulations). For the next six months, the Treasurer will be given a temporary instrument-making power under s 1362A of the Act to temporarily exempt or modify provisions of the Act or the Regulations to provide relief from specific obligations or to modify obligations for classes of persons to enable compliance with legal requirements during the crisis. This will apply for six months and any instrument made under the power will apply for up to six months from the date it is made. The legislative guidance suggests that relief would only be given where a class of persons are unable to comply with their obligations – because it would not be reasonable to expect them to comply with the provisions or because the exemption or modification is otherwise necessary or appropriate to facilitate the continuation of business or mitigate economic impacts due to the Coronavirus pandemic.

No doubt this power could be used to extend and amend the operation of some of these initiatives, as well as introduce new ones as events evolve.

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