COVID-19: Temporary changes to insolvency laws

Summary

On 23 March 2020, the Federal Parliament passed the Coronavirus Economic Response Package Omnibus Bill 2020 (the COVID Act).

The COVID Act received Royal Assent on 24 March 2020 which amended, amongst other things, the Corporations Act 2001, the Bankruptcy Act 1966 and the Bankruptcy Regulations 1996 to temporarily release directors from a risk of personal liability for insolvent trading, as well as increase the minimum amount and time-frame for both statutory demands and bankruptcy notices.

Directors' liabilities

The COVID Act inserts section 588GAAA into the Corporations Act 2001 (the Act), "Safe Harbour—Temporary Relief in response to the Coronavirus". Under this section a director will not be personally liable for insolvent trading in respect of a debt incurred:

• in the ordinary course of the company's business; and
• during the six-month period starting on the day the section commences (or any longer prescribed by the regulations).

Therefore, during the prescribed six-month time frame, directors will be relieved of the risk of a personal liability for insolvent trading, with respect to debt incurred in the ordinary course of the company's business.

How one classifies "debt incurred in the ordinary course of the company's business" is, in these testing times, still open to interpretation. Even more so, given that the amendments are silent on debts incurred that are not in the ordinary course of carrying on the company's business. Nevertheless, section 588GAAA suggests that directors will not be personally liable for such debts as would normally be the case under the insolvent trading regime prior to 25 March 2020.

Directors should be mindful that other directors' liabilities under the Act, and generally, have not otherwise been amended.

Creditors' statutory demands

The COVID Act amends section 459 of the Act and regulations so that for the next six months:

• The monetary threshold to issue a statutory demand has increased so that a statutory demand may now only be issued on a company by creditors for a debt of $20,000 or more, instead of the previous amount of $2,000.
• The time limit to respond to a statutory demand has been extended so that companies now have six months to respond to a statutory demand, instead of the previous 21 days.
• The amendments to the Act will only apply to statutory demands issued on or after 25 March 2020 and will not apply retrospectively.
• The amendments to the Act will only apply for six months starting 25 March 2020, unless that period is extended.

Bankruptcy notices

Similarly, the COVID Act amends the Act, the Bankruptcy Act 1966 and the Bankruptcy Regulations 1996 so that for the next six months:

• The monetary threshold, being the debt required before a creditor can initiate bankruptcy proceedings against a debtor has increased from the current amount of $5,000 to $20,000.
• The time limit to respond to bankruptcy notices has been extended so that debtors now have six months to respond to a bankruptcy notice, which was previously 21 days.
• The amendment will apply to bankruptcy notices filed on or after 25 March 2020.
• Bankruptcy notices issued prior to 25 March 2020 will only be provided the 21-day response period for compliance.

Thank you to Julia Nettle for her assistance in preparing this update.

Our team is actively monitoring and considering the implications of legal and regulatory developments in response to the COVID-19 pandemic. You can find our COVID-19 collection here.