26/03/2020

On 23 March 2020, in response to the increasing economic threat that the Coronavirus poses, the Commonwealth Government introduced the Coronavirus Economic Response Package Omnibus Bill 2020 (Economic Response Bill).  The Economic Response Bill proposes various amendments to the Corporations Act 2001 (Cth) (Act), with the objective of providing temporary relief for financially distressed businesses and promoting business continuity in the current climate.  The Bill was passed by both Houses of Parliament on 23 March 2020 and received Royal Asset on 24 March 2020. The provisions came into effect on 25 March 2020. 

The Bill, as it relates to financially distressed businesses, seeks to provide a safety net for businesses in financial difficulty so that they can remain operational and resume normal activity once the threat of the Coronavirus subsides. 

The temporary provisions (expressed to last six months), which are specific to the corporate insolvency law regime, can be summarised as follows:

  • An increase in the threshold at which creditors can issue a statutory demand (from $2,000 to $20,000) and the time companies have to respond to a statutory demand (from 21 days to six months).
  • Relief for directors and holding companies from any liability for new debt incurred during the period a company trades whilst insolvent provided the debt is incurred in the ordinary course of the company’s business.
  • The ability for the Treasurer to provide targeted relief for classes of persons from provisions of the Act (by legislative instrument), in order to enable companies to deal with unforeseen events and Government actions resulting from the Coronavirus.

Statutory Demands

The failure to comply with a statutory demand is a presumption of insolvency under the Act.  By both increasing the minimum debt required and increasing the time in which a creditor has to comply with a statutory demand, the Government is seeking to provide breathing space for companies to deal with their creditors.  Creditors will still have the right to enforce debts against companies or individuals through the courts; however, they will not be able to rely upon a failure to pay to initiate winding up proceedings until the end of the six-month period.

The above amendments will only apply to statutory demands served after 25 March 2020.  The increased dollar threshold and increased time frame will only be in place for a six-month period.

Insolvent Trading

The relief from liability for directors and holding companies will only apply with respect to debts that are incurred:
•    during the six-month period from 25 March 2020;
•    in the ordinary course of the company’s business; and
•    before any appointment during that period of an administrator or liquidator over the company.

As to what it means for a debt to be incurred “in the ordinary course of business”, in introducing the proposed amendments, the Commonwealth Government suggested that a debt necessarily incurred in order to facilitate the continuation of a business during the next six-month period (such as the taking out of a loan in order to move some of the businesses’ operations online, or to continue to pay employees), would be regarded as a debt incurred “in the ordinary course of business”.

Flexibility in the Corporations Act and Treasurers Instruments-Making Powers

The Coronavirus crisis and the actions the Commonwealth and State Governments are currently taking and may take in the near future have the potential to disrupt the operations of businesses or create unforeseen issues that will need to be dealt with quickly by company officers during a period in which business-continuity is important. 

Ordinarily, a company would have the option of issuing a request to the Australian Securities and Investments Commission (ASIC) for relief from failure to fulfil or comply with obligations under certain provisions of the Act, however this can be a time-consuming and drawn out process. 

Accordingly, in recognising the likelihood of significant business disruption in the current circumstances (particularly where businesses may have limited ability to plan or mitigate against issues that might arise), the Treasurer has been granted a temporary power to, by legislative instrument, relieve specified classes of persons from obligations owed under the Act and / or the Regulations, by either exempting them from specified obligations or modifying their obligations (generally or by specified conditions). 

At this stage, any relief granted by the Treasurer under this power will only have effect for a maximum period of six-months from the date on which the instrument is made.

For more articles and legal advice on COVID-19, visit G+T’s COVID-19 hub: https://www.gtlaw.com.au/knowledge/covid-19
 

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