COVID-19 Coronavirus and Changes to Insolvency Laws
In response to the evolving COVID-19 Coronavirus pandemic and the resulting economic crisis, the Commonwealth Government of Australia have recently passed the Coronavirus Economic Response Package Omnibus Act 2020 (Cth), which details temporary measures put in place to assist businesses, individuals, and the Australian economy moving forwards. We have identified several key measures that have been temporarily introduced under this Act that may be applicable to our clients as outlined below.
Director’s Liability for Companies Trading Whilst Insolvent
Pursuant to the Corporations Act 2001 (Cth), a director of a company has a duty to prevent the company from trading insolvent, and the director may be personally liable for any debts incurred. Under the recent changes, a director of a company will not be held to be personally liable for any debts incurred by the company when trading whilst insolvent, subject to the following conditions.
This “safe harbor” temporary measure applies for trading that occurs in the 6 months following from 24 March 2020. The debt(s) must be incurred in the context of ordinary course of the company’s business during the six month period, and prior to the appointment of an administrator or liquidator.
In the Explanatory Memorandum detailing the changes, the government indicated that ordinary course of the company’s business is where it is “necessary to facilitate the continuation of the business during the six month period”, such as moving an aspect of the business to the online forum or paying employees. The director bears the onus of proving that there is a reasonable possibility that an applicable situation exists.
Temporary changes regarding Statutory Demands
Previously under the Corporations Act, a creditor cannot issue a statutory demand on a debtor company unless the debt owed by the company is at least $2,000. Under the temporary changes, this statutory minimum has been temporarily increased to $20,000. Further, the time which a company has to respond to a statutory demand has been increased from 21 days to six months. This is an important extension of time, as a company that fails to respond within the legislative timeframe may be presumed to be insolvent. These temporary changes will last for 6 months only.
Temporary changes to Bankruptcy for Individuals
Similarly, changes have been made to the Bankruptcy Regulations 1996 in relation to individuals and bankruptcy. Previously a creditor could not commence bankruptcy proceedings against an individual debtor unless the debt owed by the individual was $5,000 or more. Under the temporary changes, this statutory minimum has been temporarily increased to $20,000.
Further, the statutory period which an individual has to comply with a bankruptcy notice has been increased from 21 days to six months. Lastly, the default period, being the time after a debtor declares their intention to present a debtor’s petition (intending to enter bankruptcy) and is protected from enforcement action by a creditor, is temporarily increased from 21 days to six months. As above, these temporary changes will last for 6 months only.
The rationale for temporary changes outlined above is to support businesses and individuals that may be suffering financially as a result of Coronavirus, and to assist in the growth of the Australian economy post-COVID-19.
A comparison of key features of the new law and the current law has been summarised below:
Comparison of key features of new law and current law
| New law | Current law |
| The minimum amount of debt required to be owed before a creditor can initiate involuntary bankruptcy proceedings against a debtor is temporarily $20,000. | The minimum amount of debt required to be owed before a creditor can initiate voluntary bankruptcy proceedings against a debtor is$5,000. |
| The timeframe in which a debtor must comply with a bankruptcy notice is temporarily six months. | The timeframe in which a debtor must comply with a bankruptcy notice is 21 days. |
| The timeframe in which a debtor is protected from enforcement action by a creditor following presentation of a declaration of intention to present a debtor’s petition is temporarily six months. | The timeframe in which a debtor is protected from enforcement action by a creditor following presentation of a declaration of intention to present a debtor’s petition is 21 days. |
| The statutory minimum for a creditor to issue a statutory demand to a debtor is temporarily increased to$20,000. | The statutory minimum for a creditor to issue a statutory demand to a debtor is $2,000. |
| There is a temporary (six month) increase to the period – the statutory period – within which a debtor must respond to a statutory demand. The period is increased from 21 days to six months. | A debtor has 21 days to respond to a statutory demand. |
| A new section provides that directors have temporary relief from personal liability for insolvent trading if debts are incurred in the ordinary course of business. | Directors have a duty to prevent insolvent trading. |
About LGM Advisors
The above has been provided for your information and is not to be relied upon as legal advice. Advice may differ depending on a number of factors, including the continued updates from the government.
LGM Advisors is a leading commercial litigation Melbourne professional law firm, the experts to contact when you require commercial lawyers and employment lawyers. LGM Advisors have the skills, experience and expertise to ensure that you and your dispute is consulted upon with the utmost professionalism. Contact LGM Advisors today on (03) 9832 0608 or by email at contact@lgmadvisors.com.au.
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