The Australian Government has taken swift action to enact new legislation which significantly changes the insolvency laws relevant to all business as a result of the ongoing COVID-19 related developments.
- Temporary relief from insolvent trading and associated personal liabilities for directors seeking to navigate a path to financial viability and recovery for their companies, amid significant and rapidly changing economic and trading challenges.
- Statutory demands from today onwards must be for more than AUD$20,000. This represents a tenfold increase on the previous minimum. Debtor companies must also now be given a statutory minimum of 6 months for the claimed debt be paid or compromised, or for an application to be made to set aside the demand. The statutory period to make an application to set aside any demand has also been significantly increased from 21 days to 6 months.
The Coronavirus Economic Response Package Omnibus Act 2020 (Cth) (COVID-19 Response Act)
The COVID-19 Response Act passed both houses of Parliament this week and comes into effect as of today. It is primarily designed to provide temporary relief for companies experiencing financial distress as a result of the ongoing (and rapidly changing) economic slowdown brought about by the COVID-19 virus.
Although the amendments under the COVID-19 Response Act only apply for 6 months (to approximately 23 September 2020), the provisions may be expanded in terms of their application or scope subject to economic and health developments.
The most significant temporary relief measure is in relation to a director’s duty to prevent insolvent trading.
The COVID-19 Response Act will amend the Corporations Act (Cth) 2001 (Corps Act) such that a new section (588GAAA) will be inserted into Corps Act with the effect of directors being provided a new safe harbour of 6 months from incurring personal liability for insolvent trading in relation to debts incurred in the ordinary course of their businesses. The new relief measures may be protect directors from personal liability provided the transactions which they give effect to meet certain requirements including (without limitation) the incurring of a debt:
- in the ordinary course of business after the enactment of the COVID-19 Response Act; and
- prior to the engagement or appointment of any external administrator
The Federal Government recognises that if companies are to survive the challenges posed by the virus and its associated economic slowdown, directors will need to address the financial challenges of their business in new and potentially expanded ways including obtaining new debt, seeking credit, raising equity and changing business operations away from traditional headquarters and, retaining and enabling a more mobile workforce. Those considerations are at the heart of the COVID-19 Response Act and are intended to encourage and support directors to take calculated financial risks and promote enterprise.
Regulations & treatment of debts
The COVID-19 Response Act will be supplemented by regulations which have not yet been released. It is likely that the regulations will give more guidance and most probably prescribe circumstances in which the relief measures may or may not apply. Directors should consider the regulations and seek appropriate advice before they start taking action on basis of the relief measures outlined above. Further, directors should also note that none of the relief measures are intended to, or permit, the delay of debts during the relief period. Accordingly, where debts cannot be paid as and when they fall due, directors should seek appropriate advice and otherwise engage with their stakeholders and in particular, their priority creditors under the Corps Act.
Statutory lodgement and reporting obligations
Relief from insolvent trading liabilities under the COVID-19 Response Act will not be dependent on companies firstly ensuring that their statutory lodgement and reporting obligations to (amongst others) the Australian Taxation Office are being met, or that payment of employee entitlements are made. Those pre-requisites apply to traditional safe harbour protections under the Corps Act, and whilst the Federal Government has not sought to extend them to the COVID-19 Response Act, directors should still seek to appropriately discharge their reporting and priority creditor obligations as appropriate.
In the ordinary course of business
It is imperative that directors keep in mind the fact that relief under the new measures will only be afforded in respects of new debts incurred in the ordinary course of business. Accordingly, much will depend on the scope and application of that term to different types of business. The explanatory memorandum to the COVID-19 Response Act stipulates that:
A director is taken to incur a debt in the ordinary course of business if it is necessary to facilitate the continuation of the business during the six month period that begins on commencement of the subparagraph. This could include, for example, a director taking out a loan to move some business operations online. It could also include debts incurred through continuing to pay employees during the Coronavirus pandemic.
As discussed above, given the Federal Government is seeking to support enterprise and sensible financial risks being taken, it is likely that an expansive view may be applied to the notion of the ordinary course of a business. That said, given the wide ranging impacts of the virus and consequent economic slowdown, businesses in different sectors will be affected in different ways and they should consider seeking appropriate advice before taking on any significantly new or different types of debt.
Other director duties not affected
Finally, directors should must bear in mind that their other duties (whether under the Corps Act or otherwise) remain the same and they should continue to appropriately discharge those duties. In particular, the duties owed by directors to the company and their other stakeholders have not changed and will continue to be apply.