COVID-19 Temporary Government Relief from Insolvent Trading

COVID-19 Temporary Government Relief from Insolvent Trading

The Australian Government, as part of its Press Conference on Sunday 22 March, 2020, announced its second economic stimulus package in response to the current COVID-19 global pandemic.  Included in that package are several initiatives intended to provide temporary relief for financially stressed businesses.  Full details are available here.

In summary, the elements of the package are:

  1. increase the minimum threshold to issue a statutory demand from $2,000 to $20,000;
  2. increase the minimum threshold to issue a bankruptcy notice from $5,000 to $20,000;
  3. extend the time for compliance with a statutory demand or bankruptcy notice from 21 days to 6 months;
  4. temporarily relieve directors of their duty to prevent insolvent trading for any debts incurred in the ordinary course of business; and
  5. provide the Treasurer with a temporary instrument making power in the Corporations Act 2001 (the Act) to provide targeted relief for companies from specific obligations under the Act.

With more businesses continuing to suffer as a result of the ongoing health crisis, these measures have been highly anticipated and will no doubt be welcomed.  Though we anticipate that legislation will be forthcoming as a matter of urgency, it is important to note that they are yet to come into legal effect.  Until further information or a draft Bill are made available, it is unknown whether the legislation (and measures) will have a retrospective effect.

Insolvent Trading Relief

Section 588G of the Act imposes a duty on a director to prevent the company from incurring a debt where there are reasonable grounds for suspecting the company is, or would become, insolvent.  A director can be personally liable for the insolvent trading of the company if they are found to have breached this duty.

We previously wrote an article about the ‘safe harbour’ provisions, which were introduced in 2017 and protect a director from liability under section 588G in limited circumstances.

The second economic stimulus package proposes to relieve a director from personal liability for trading while insolvent in relation to debts which are incurred in the ordinary course of the company’s business.  This is to encourage businesses to “ride out” the current period of financial stress, with a view to return to viability once the crisis has passed.

Notably, any debts incurred by the company will still be payable by the company and egregious cases of dishonesty and fraud will still be subject to criminal penalties.

We recommend that directors seek advice now to ensure that they avoid liability when trading through the crisis induced financial pressure.

Treasurer Instrument-making Power

The Treasurer will be given a temporary instrument-making power for six months to amend provisions of the Act.  Any amendment made under that power will apply for up to 6 months from the date that it is made.  The purpose of this power is to provide flexibility in relieving companies from specific obligations or modifying obligations under the Act, to enable compliance with legal requirements during the crisis.

This is important, as ASIC only has limited power to offer companies relief from provisions of the Act or to not take action against companies for non-compliance.  Also, companies would need to make individual requests to ASIC for that power to be exercised.

Directors will need to stay informed as and when the Treasurer does exercise this power, to ensure that their company will remain compliant with legal requirements as easily as possible.  An example of how the Treasurer may exercise this power would be to vary the requirement to hold face-to-face AGMs, allowing a company to instead hold the AGM via videoconference.

We understand of course that this is a challenging time for many people and businesses alike. There is confusion and uncertainty, from both a regulatory perspective and in the market, with things changing every day. As always, our specialist team are available to answer any questions which you may have. Our office will remain open until the Australian Government directs closure and we are willing to assist our community in any way we can.