In recognition of the inevitable financial impact on many Australians as a result of the COVID-19 pandemic, the Federal Government has enacted the Coronavirus Economic Response Package Omnibus Act 2020 (Cth) (“the Act”) which provides some relief to individuals and directors of financially distressed companies.
KEY TAKE OUTS:
- The Federal Government has implemented temporary amendments to bankruptcy and insolvency laws to lessen the financial impact on individuals and businesses facing financial hardship as a result of the COVID-19 pandemic.
- The amendments commenced on 25 March 2020 and are in force for 6 months, although it is anticipated that the amendments will be modified or extended to accommodate the economic climate.
- During this time of uncertainty, it is important for business owners to be aware of the relief measures afforded to them so they can manage their cash flow and resume normal business operations when the pandemic finally passes.
The Act contains temporary amendments to the Bankruptcy Act 1966 (Cth) (“Bankruptcy Act”) and the Corporations Act 2001 (Cth) (“Corporations Act”) commencing 25 March 2020 which minimise the threat of actions that could force individuals into bankruptcy and once profitable companies into insolvency. The temporary amendments are explained below.
Temporary Amendments to Bankruptcy Notices
A bankruptcy notice is a formal demand issued by a creditor to an individual for payment of a judgment debt of at least $5,000 or more. Under the Bankruptcy Act, a person has 21 days from the date of receiving a bankruptcy notice to comply. If the debtor does not comply within 21 days, they will be committing an act of bankruptcy.
To assist individuals with managing debt and avoiding bankruptcy, the Federal Government has temporarily increased the minimum debt threshold for the issuing of a bankruptcy notice from $5,000 to $20,000. It has also increased the period of time for an individual to respond to a bankruptcy notice from 21 days to 6 months.
Temporary Amendments Statutory Demands
A statutory demand is a formal demand issued by a creditor to a company for debts owed of at least $2,000 or more. Under the provisions of the Corporations Act, if a company does not respond to a statutory demand within 21 days, it will be deemed to be insolvent and could be wound up.
Under the new amendments, the minimum debt threshold required for a creditor to issue a statutory demand has temporarily increased from $2,000 to $20,000. In addition, the period of time to comply with a statutory demand has temporarily increased from 21 days to 6 months.
Temporary relief for directors from duty to prevent Insolvent Trading
Company directors have a duty to ensure that their company does not trade while insolvent. If a company is insolvent and a director allows the company to incur a new debt, the director can be personally liable for the debt and can face criminal and civil penalties.
A new temporary ‘safe harbour’ provision has been inserted into the Corporations Act which provides directors with temporary relief for a period of 6 months from personal liability for trading while insolvent.
A director can rely on the new provision if the debt is incurred within the 6 month period commencing 25 March 2020 and the debt is necessary to facilitate the continuation of the business, for example, if a director takes out a loan to transfer business operations online.
It is important to note that creditors are still able to claim their debts through Court proceedings and can commence enforcement proceedings through the ordinary channels which are still enforceable.
If you require any assistance with respect to bankruptcy and insolvency matters or have any questions about how these amendments will affect your business, please do not hesitate to contact us.
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This blog is merely general and non specific information on the subject matter and is not and should not be considered or relied on as legal advice. Coutts is not responsible for any cost, expense, loss or liability whatsoever in relation to this blog, including all or any reliance on this blog or use or application of this blog by you.