On 24 March 2020, the Morrison Government introduced a number of fundamental changes to the Australian bankruptcy and insolvency laws. The amending Act, known as ‘Coronavirus Economic Response Package Omnibus Act 2020’ (the ‘Coronavirus Act’) seeks to offset the long-term financial implications suffered by businesses, individuals and the greater community as a result of the Covid-19 outbreak.
The Coronavirus Act provides four key changes. The Act:
- Relieves directors of the personal liability for insolvent trading for debts incurred in the ordinary course of business and without dishonesty and fraud;
- Protects companies from entering into insolvency by amending the prerequisites for issuing a statutory demand;
- Protects individuals from entering into bankruptcy by amending the prerequisites for issuing a bankruptcy; and
- Subject to certain conditions, protects individuals from bankruptcy by increasing the timeframes for individuals to reach an agreement with their creditors.
These four key changes took effect on 25 March 2020 and will remain in place until 25 September 2020. To learn more about these changes and what they mean for you, please see below or contact one of our Australian based solicitors for advice on 07 3269 4888.
DIRECTOR LIABILITY FOR INSOLVENT TRADING
The term ‘insolvency’ is given a special meaning by the Corporations Act 2001. A company is defined to be insolvent if it is unable to pay all of its debts as and when they become due and payable.
As a director, you have a duty to prevent your company from becoming insolvent. If you have reasonable grounds to suspect that your company is insolvent, you should seek legal advice immediately. Alternatively, if you believe that your company may become insolvent by incurring a debt, you must avoid incurring that debt.
Under the Corporations Act, a company’s director may be held personally liable for insolvent trading if a company incurs a debt that results in its insolvency. Personal liability under the Act will arise if:
- You were aware at the time that there were grounds for suspecting that the company was insolvent or would become insolvent by incurring a debt; or
- A reasonable person in a like position in the circumstances would have been aware.
Relief from liability – prior to the Covid-19 amendment
In certain circumstances, a director that may otherwise be liable for a contravention of the insolvent trading provisions, may be able to rely on the ‘safe harbour’ provision of the Act to shield itself from personal liability for insolvent trading.
The safe harbour provision applies where a director, suspecting that the company may become or be insolvent, incurs a debt directly or indirectly in connection with a course of action taken that is reasonably likely to lead to a better outcome for the company.
Relief from liability – post Covid-19 amendment
The changes implemented under the Coronavirus Act, in effect, provide a blanket exception to liability for insolvency associated with debts occurred in the ordinary course of a company’s business during the period 25 March 2020 to 25 September 2020 (unless otherwise prescribed by the regulations).
The exception does not apply if the debt is incurred before the appointment of a liquidator or administrator of the company, or if the insolvent trading involves an element or fraud or dishonesty which will expose the director to criminal liability.
What do these changes mean for directors?
The changes, particularly when coupled with the amendments to the statutory demand prerequisites (discussed below), are likely to prove to be a powerful tool for companies attempting to survive the financial implications of the coronavirus outbreak.
If your company is experiencing financial distress, you will have greater flexibility to attempt to trade out of financial difficulty. These changes mean that you will be able to incur a debt in your usual course of business even if you will be unable to repay that debt ‘when and as it falls due and payable’. Unless you have a personal obligation to repay the debt (e.g. you have given a personal guarantee), the new provisions will relieve you of personal liability both presently and in the event that your company is eventually wound up.
However, you should keep in mind your obligations to carry out your duties with care and diligence, and duty to act in good faith and for a proper purpose. The exception from liability for insolvent trading will not relieve you of your other duties and obligations. You should not incur additional debts unless you believe that you will reasonably be able to repay the debts when the market conditions improve.
If you are unsure of where you stand or how to reconcile your duties with the amendment to the safe harbour provision, we recommend seeking legal advice.
STATUTORY DEMAND – PREREQUISITE AMENDMENTS
Creditors seeking to take action to liquidate a company must typically issue a ‘statutory demand’. A statutory demand is a demand made to a company under the Corporations Act for the payment of a debt. The demand left unchallenged creates a presumption of insolvency.
The Coronavirus Act limits the circumstances in which a statutory demand may be issued. In particular, it extends the company’s time for response from 21 days to six months and increases the prescribed minimum debt to issue the demand from $2,000 to $20,000.
BANKRUPTCY NOTICE – PREREQUISITE AMENDMENTS
A creditor may issue a bankruptcy notice against an individual. A bankruptcy notice is a formal demand for payment which if not complied with, entitles the creditor to commence court proceedings to bankrupt the individual.
The Coronavirus Act limits the circumstances in which a bankruptcy notice may be issued. In particular, it extends the individual’s time to respond from 21 days to six months and increases the prescribed minimum debt to issue the notice from $5,000 to $20,000.
DECLARATION OF INTENTION TO PRESENT A DEBTOR’S PETITION – EXTENSION
Individuals facing bankruptcy may seek an arrangement with their creditors to avoid bankruptcy. A declaration of intention to present a debtor’s petition may temporarily restrain your creditors from taking enforcement action against you (such as garnisheeing your wages or seizing your assets). This period of restraint provides you with a fixed period of time to consider your options and negotiate with your creditors. This period of restraint has been extended under the Coronavirus Act from 21 days to six months.