Bankruptcy, Insolvency and Coronavirus: What you need to know April 29, 2020

The Coronavirus pandemic is an unprecedented crisis, fuelling a massive debt risk for Australian businesses and individuals

As a result of the COVID-19 pandemic, Australian state and territory governments have had to take necessary and urgent steps to protect the health of Australians, imposing restrictions on individuals, communities and businesses. These restrictions are in turn having a detrimental effect on the federal and state economies, and companies and individuals and their businesses, all of which run the risk of falling further into debt the longer this pandemic continues.

What are the financial risks to companies and individuals?

Individuals may be confronted with the risk of personal debts and businesses will be confronted with restrictions on the ability to:

• Trade
• Make income
• Pay outstanding debts
• Maintain existing repayment arrangements
• Retain employees

As a result, the risk of more individuals becoming bankrupt or companies becoming insolvent is extremely high.

In response, the Federal Government has implemented changes to and enacted new legislation. The Coronavirus Economic Response Package Omnibus Act 2020 (the Act) came into effect on 25 March 2020. The Temporary Amendments are found in Schedule 12 of the Act.

What are the Temporary Amendments?

 The main changes are:

Bankruptcy

• The debt threshold for creditors to be able to issue a bankruptcy notice on or after 25 March 2020 has been increased from $5,000 to $20,000.

• Once the debtor has been served with the bankruptcy notice, the time for compliance with the bankruptcy notice (that is before bankruptcy proceedings can be commenced) has been extended from 21 days to 6 months.

Insolvency

• The debt threshold from which creditors can issue a statutory demand against a company on or after 25 March 2020 has been increased from $2,000 to $20,000.

• A company which is served with a statutory demand on or after 25 March 2020 now has 6 months to respond to the statutory demand from the date of the statutory demand being served (either by making full payment of the debt, negotiating a payment arrangement with the creditor or applying to have it set aside on the basis of there being a genuine dispute with respect to the debt) before a creditor can commence a wind up application.

Directors Duty to Prevent Insolvent Trading

Directors will be temporarily relieved of their obligations to prevent a company from trading whilst insolvent commencing 25 March 2020 for 6 months. This protection will only apply:

• to debts that are incurred on or after 25 March 2020;
• to debts incurred in the ordinary course of the company’s business.

The 6-month moratorium will protect Directors from being personally liable for debts incurred by the insolvent company during these extraordinary times. They will provide some breathing space for directors to:

• Assess the company’s financial viability
• Seek professional advice
• Make decisions about trading through the economic crisis (to the extent that is reasonable)
• Consider all possible avenues

before the need to resort to the appointment of an administrator or liquidator.

However, the temporary relief does NOT relieve Directors of their ongoing obligations under the Corporations Act (Cth) 2001, for example:

• Exercising due care and diligence
• Exercising their powers in good faith and for proper purpose
• Acting in the best interest of the company

A company is still liable for paying its creditors debts incurred during this 6-month moratorium period. Directors should continue to keep clear records and documentation of all their business transactions and consider seeking independent legal and financial advice where necessary.

Further, the temporary relief measures do not exempt directors from egregious cases of dishonesty and fraud, and directors will still be subject to the same criminal penalties should they be found guilty of dishonesty and fraud.

How long will the amendments last?

The Temporary Amendments commenced on 25 March 2020 and remain in effect for the next 6 months, which means they lapse 25 September 2020 (unless extended or amended on the advice by the Federal Government).

On a final note

In addition to passing the Act, the Federal Government has granted the Federal Treasurer temporary powers for 6 months commencing 25 March 2020, to make changes or modify obligations under the Corporations Act (Cth) 2001or the Corporations Regulations (Cth) 2001 , to provide businesses temporary relief where businesses cannot meet the financial or legal obligations during these unprecedented times. Relief may include:

• Relaxed disclosure obligations
• Relaxed requirements to hold company meetings

The limit and scope of the Federal Treasurer’s powers is currently unclear however it is expected that the Federal Treasurer will apply his powers in a discretionary way.

For more information about how you or your business is impacted by bankruptcy and insolvency issues, contact us for advice.

DISCLAIMER: We accept no responsibility for any action taken after reading this article. It is intended as a guide only and is not a substitute for the expert legal advice you can get from marshalls+dent+wilmoth and other relevant experts.