On 22 March 2020, the Commonwealth Government announced temporary changes to the insolvency law to assist businesses with the economic impacts of the Coronavirus. The measures announced by the Government are designed to lessen the threat of action that could unnecessarily push businesses into insolvency and force their winding up. The apparent objective of these measures is to encourage businesses to continue to trade during the ongoing crisis.
The measures have now been enacted as part of the Coronavirus Economic Response Package Omnibus Act 2020 (Cth) (the Act) which was passed and received Royal Assent on 24 March 2020. The measures are contained in Schedule 12 to the Act and commence the day after the Act received Royal Assent, ie today, 25 March 2020.
Schedule 12 to the Act amends the Bankruptcy Act 1966 (Cth) and the Bankruptcy Regulations 1996 (Cth), and the Corporations Act 2001 (Cth) and the Corporations Regulations 2001 (Cth) to provide increased thresholds for issuing, and timeframes for responding to, Bankruptcy Notices and Statutory Demands. Additional amendments to the Bankruptcy Act also extend the moratorium period applicable to debtors who present a declaration of intention (to present a debtor’s petition). The amendments to the Corporations legislation also provide temporary relief for directors from the duty to prevent insolvent trading.
These temporary measures apply for a period of 6 months from the commencement of the new laws. Whilst they are in place:
- to request a Bankruptcy Notice or to present a creditor’s petition, a creditor (or two or more petitioning creditors) must be owed debts totalling $20,000 or more (up from $5,000). A Bankruptcy Notice under section 41(1) of the Bankruptcy Act must be supported by one or more final judgments or orders which satisfy this threshold. The same threshold will need to be satisfied by creditors seeking to present a creditor’s petition for a sequestration order under section 44 or for an order for the administration of a deceased debtor’s estate in bankruptcy under section 244;
- for the purposes of section 40(1)(g) of the Bankruptcy Act, a debtor does not commit an act of bankruptcy based on a failure to comply with a Bankruptcy Notice unless he or she fails to do so within a period of 6 months after being served with the notice (up from 21 days) or, for notices served outside Australia with leave of the Court, within the time specified by the relevant order;
- the moratorium or “stay period” period following the presentation of a declaration of intention has also been extended to 6 months (up from 21 days). Under section 54E of the Bankruptcy Act, a creditor is prevented from initiating court processes to enforce certain debts owed to it or to enforce any remedy it might have against the debtor’s person or property in respect of those debts during the stay period;
- to serve a Statutory Demand on a company pursuant to section 459E(1) of the Corporations Act, the demand must relate to one or more debts, due and payable, totalling at least $20,000 (up from $2,000);
- for the purposes of sections 459G(2) and (3) and 459F(2)(a) of the Corporations Act, the period within which a company may respond to a Statutory Demand is 6 months (up from 21 days); and
- a new section 588GAAA has been introduced into the Corporations Act to provide a safe harbour from director liability for insolvent trading under section 588G. Section 588WA of the Corporations Act has also been amended to prevent section 588V from applying to a holding company of a company that incurs a debt whilst insolvent where the holding company has taken reasonable steps to ensure that the new section 588GAAA (or the existing section 588GA) applies to each of the directors of the latter company and to the relevant debt. Section 588GAAA applies where the relevant debt is incurred in the ordinary course of the company’s business during the 6 months after commencement of the section (or any longer period that may be prescribed by the regulations) and before any appointment during that period of an administrator or liquidator of the company. A person wishing to rely on the safe harbour bears the evidential burden in relation to that matter
It should be noted that the new safe harbour in section 588GAAA applies in addition to the existing defences under the Corporations Act. These include sections 1317S and 1318 which empower the Court to grant relief from liability for breach of a civil penalty provision (which includes insolvent trading) or to excuse liability, where a director has acted honestly and, having regard to all the circumstances of the case, ought fairly to be excused for the contravention. Section 1317S applies to specified “eligible proceedings” whereas section 1318 applies to any civil proceedings “for negligence, default, breach of trust or breach of duty in a capacity”.
It should also be noted that the approved form for Statutory Demands has also been amended to highlight the relevant changes to the statutory demand regime.
If you require assistance in relation to an insolvency matter, please contact us on (07) 3251 6777.
25 March 2020
Author: Brian Lambert
Contact: + 61 7 3251 6777.
Warning: The content of this post is intended only to raise the awareness of readers to the issues discussed. It is not intended to constitute, and should not be relied upon as advice of any kind. Readers should seek specific legal advice regarding their particular circumstances.