An Update on the Coronavirus Interim Changes to the Insolvency Rules
/The Coronavirus Economic Response Package Omnibus Act 2020
27 March 2020
On 22 March 2020 the Australian Government announced urgent changes to the insolvency rules as set out in the Corporations Act 2001 (Cth), the Corporations Regulations 2011 (Cth) and Bankruptcy Act 1966 (Cth), on 24 March 2020, royal assent was given to the Coronavirus Economic Response Package Omnibus Act 2020 (the Act). The Act has shed some light on how the changes will operate, as follows.
Statutory Demands
The changes impacting the issue of statutory demands and bankruptcy notices will have effect during the 6-month period commencing on 25 March 2020. Accordingly, during this period, statutory demands will only be capable of being issued with respect to debts of $20,000 or more and must provide the debtor with 6 months to respond.
During this period, creditors providing goods or services should also be cognisant that, if the business to which they are providing those goods or services is likely to face difficulty in paying for same, then they could face an extended period (of six months or more, by the time matters are listed in Court), to recover debts. Creditors should consider introducing accelerated payment terms or requesting payment up front or funds to be deposited on trust.
Moratorium on Insolvent Trading
Further, the Act introduces section 588GAAA to the Corporations Act 2001 (Cth) to provide safe harbour for a debt incurred:
a) in the ordinary course of business;
b) during the six-month period commencing; and
c) before any appointment during that period of an administrator, or liquidator, of the company.
Whilst it is yet to be seen how lenient Court’s will be in determining what comprises a debt incurred “in the ordinary course of business”, we certainly do not envisage the provision covering a director incurring debts unrelated to keeping the business afloat during this difficult period, and which would ordinarily otherwise be considered unreasonable.
As foreshadowed, the amendments to the Act do not change the provisions relating to the calculation of the “Relation Back Day”. However, it may not be necessary for it to do so. Ultimately, the date of insolvency in most cases will remain unchanged. The provision will just carve a 6-month period out of the time within which insolvent trading claims can ordinarily be made. It is notable, however, that while there may be a temporary moratorium on the insolvent trading regime, the amendments do not affect other potential claims against directors who fail to take reasonable care or exercise reasonable skill or diligence in the administration of a company, or who, for example, deliberately or recklessly mislead or deceive trade creditors as to the company’s ability to pay its debts as and when due.
Finally, whilst the provisions are in place for a 6-month period, the Act provides scope for the Treasurer to extend their operation at anytime during those 6 months.
If you would like more specific advice in relation to the above, please contact our office on
08 6245 0222 or enquiries@emslegal.com.au.
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