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COVID-19 Temporary changes to insolvency and corporations laws

COVID-19 Temporary changes to insolvency and corporations laws

05 November 2020 Helpful tips



On 22 March 2020 the Australian Federal Government announced that it intends to make temporary amendments to insolvency and corporations laws in light of the challenges COVID-19 poses to many otherwise profitable and viable businesses.

The Coronavirus Economic Response Package Omnibus Bill 2020 (Cth) was passed on 23 March 2020 and is expected to receive royal assent within days. The temporary measures referred to in the Bill will not have retrospective application and will be effective for a 6 month period.

In brief, the elements of the package are:

  • A temporary (6 month) increase in the threshold at which creditors can issue a statutory demand on a company and the time companies have to respond to statutory demands they receive (from $2,000 to $20,000 and companies will have 6 months to respond to statutory demand rather than 21 days);
  • A temporary (6 month) increase in the threshold for a creditor to initiate bankruptcy proceedings, an increase in the time period for debtors to respond to a bankruptcy notice, and extending the period of protection a debtor receives after making a declaration of intention to present a debtor’s petition;
  • Temporary relief for directors from any personal liability for trading while insolvent;
    • The relevant trading debts to which the relief applies, are those incurred in the ordinary course of business during the 6 month relief period. The explanatory memorandum to the Bill explains ‘ordinary course of business” as follows:-
    • “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… [once the legislative changes come into effect]. 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.”
    • The Bill has been drafted such as to facilitate a further extension of the 6 month period (by amending the Regulations).
    • Even though not personally liable for debts incurred while insolvent, directors will still need to manage their general duties including to act in the best interest of the company and with due care and diligence. In an insolvency situation, the rights of creditors needs to be factored into board decision-making. Also, director liability will not change in respect of debts incurred in cases of dishonesty or fraud.
  • Providing temporary flexibility in the Corporations Act 2001 to provide targeted relief for companies from provisions of the Act to deal with unforeseen events that arise as a result of the Coronavirus health crisis. An example is with respect to the holding of physical annual general meetings.

If you have any questions relating to your obligations as a director in this extraordinary time, or in relation to managing your creditors or debtors, please feel free to contact the team at Williams + Hughes to discuss.

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