TGIF 27 March 2020: Federal Government’s response to COVID-19 – Temporary relief for distressed companies

This week’s TGIF considers the Coronavirus Economic Response Package Omnibus Act 2020, which was passed in response to the economic impact of the coronavirus.  Amongst other things, the Act makes significant changes to creditor’s statutory demands and insolvent trading laws.  

The Act

In response to the coronavirus pandemic, the Australian Government has passed the Coronavirus Economic Response Package Omnibus Act 2020 (Act).  The Act is designed to help individuals and businesses facing financial distress, providing them with the best chance of survival during this uncertain economic environment.  

The relevant sections of the Act discussed below come into effect on 25 March 2020.  The changes will be in effect for six months, until 25 September 2020. 

What’s changed?

Creditor’s statutory demands

A creditor’s statutory demand is a formal demand to a company for repayment of a debt.  A company is presumed to be insolvent if it fails to comply with a creditor’s statutory demand. 

Under the changes:

• A creditor can only issue a statutory demand if the debt is at least $20,000 (previously $2,000). 
• The debtor company will have six months from the date of service to respond to the statutory demand (previously 21 days).

These changes only apply to statutory demands served after the commencement of the legislation and will apply for six months. 

Insolvent trading 

Under the Corporations Act 2001 (Corporations Act), directors may be personally liable to pay the debts a company incurs if the company trades while insolvent.  The Act temporarily relaxes this strict position, aiming to give directors confidence to continue to trade and to help the company return to financial viability when the crisis has passed. 

The Act provides that for six months from 25 March 2020, directors will be temporarily relieved from their obligations to prevent insolvent trading, if the debts incurred are in the company’s ordinary course of business. 

While directors will not face personal liability for these debts, they may still face criminal penalties if debts are incurred dishonestly or fraudulently during this time.  Further, they may still be liable for breach of other director’s duties [https://corrs.com.au/insights/covid-19-and-the-suspension-of-insolvent-trading-laws-directors-potentially-still-liable-on-other-grounds].  

Comment

As Australian businesses face disruption and liquidity issues, these temporary changes aim to give companies the opportunity to continue to trade for as long as possible and to put them in the best position to survive and recover from the economic impact of the coronavirus pandemic.

How effectively these changes, combined with the Safe Harbour provisions introduced in 2017, stem the tide of external appointments remains to be seen.