COVID-19:Temporary amendments to insolvency laws extended to 31 December 2020

2 minute read 07.09.2020 Michael Hughes, Anthony Sommer

On 7 September 2020, the federal government announced that the temporary changes to the creditors' statutory demand and insolvent trading laws have been extended to 31 December 2020.

Key takeouts

In March 2020, the Commonwealth Government's early responses to the economic consequences of the COVID-19 included temporarily suspending and changing important elements of Australia's insolvency laws. These temporary changes were due to expire on 25 September 2020. The government has now announced that this period will be extended to 31 December 2020.

Directors should use this period to consider the need for and if available or necessary take advice about potential safe harbour plans, designed to achieve a better outcome for their companies than the immediate appointment of a liquidator or a voluntary administrator under the existing law, which continues to apply unchanged.

It remains to be seen whether this three month extension will be sufficient to stave off an expected raft of corporate collapses, such that the period will need to be extended again, or other measures will be needed.

The rules were originally introduced in March 2020 in response to the COVID-19 pandemic and were due to expire on 25 September 2020.

The temporary COVID-19 safe harbour defence for directors from liability for insolvent trading (s 588GAAA of the Corporations Act 2001 (Cth)) will now continue to apply to debts incurred after 25 September 2020, until 31 December 2020. The debts must still have been incurred after 25 March 2020 provided they are in the 'ordinary course of the company’s business'.

The use of statutory demands and bankruptcy notices will be continue to be curtailed. In each case, the monetary thresholds were increased, and the time for compliance was extended to six months. Again, this regime will continue past 25 September 2020, to demands and notices issued before 31 December 2020.

The government's media release notes that '[a]s the economy starts to recover, it will be critical that distressed businesses have the necessary flexibility to restructure or to wind down their operations in an orderly manner.' It intends for the change to 'help to prevent a further wave of failures before businesses have had the opportunity to recover'.

With Australia's economy having plunged into its first recession in nearly 30 years, there is no doubt that these changes will help avoid a potentially unprecedented wave of financial distress and corporate collapses. It remains to be seen whether this three month extension will be sufficient, such that the period will need to be extended again, or other measures will need to be developed in time to be introduced before the end of the year. The extension will also give directors additional time to take advice and, if appropriate, implement 'safe harbour' plans designed to achieve a better outcome for their companies than the immediate appointment of a liquidator or a voluntary administrator under the general safe harbour defence implemented in 2017 (s 588GA), which continues to apply unchanged.

We will provide further updates as and when the enabling legislation appears.

We discuss some of the restructuring approaches in our report, Debt restructuring in uncertain times. Find out more.

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