Temporary relief for financially distressed businesses and individuals during COVID-19
'The Australian ‘Coronavirus Economic Response Package Omnibus Bill 2020’
The Australian Government has announced temporary measures to minimise the impact of COVID-19 on Australian businesses.
These measures seek to reduce the risk of otherwise viable businesses from being wound up due to short term financial distress and afford protections to directors from potential personal liability in order to encourage continued trade through the COVID-19 crisis. Similar temporary relief measures are also extended to individuals in financial difficulty.
The Coronavirus Economic Response Package Omnibus Bill 2020 (‘CERP Legislation’) commenced on 24 March, 2020, providing various temporary relief measures for struggling businesses and individuals.
Some of the key temporary changes include the following:
Relaxation to the requirements for serving Creditors Statutory Demands on Companies
In the normal course, under section 459E of the Corporations Act, a creditor can issue a statutory demand against a company demanding payment of a debt of at least $2,000 (being the statutory minimum). The company then has 21 days after being served with the statutory demand to pay the demanded amount, reach an agreement with the creditor about the debt to the creditor’s satisfaction, or to apply to a relevant court to have the statutory demand set aside.
If a company fails to respond to the statutory demand within 21 days, it will be presumed to be insolvent and the creditor can make an application to a court for the company to be wound up.
To reduce the number of companies being liquidated, the CERP Legislation provides the following changes to the statutory demand process:
An increase to the statutory minimum amount from $2,000 to $20.000; and
An extension of the time for a debtor company to respond to a statutory demand from 21 days to 6 months.
These changes will apply for a 6 month period and apply to statutory demands that are served on or after the commencement of the CERP Legislation.
These changes do not affect the ability of the creditor to pursue a company through the courts to obtain a court order or judgement for the amount owing.
Relief for Directors from Liability for trading while insolvent
Temporary changes will relieve company directors from their duty to prevent insolvent trading for debts incurred in the ordinary course of the company’s business. Usually, under section 588G of the Corporations Act, a director of a company is under an obligation to prevent the company trading while it is insolvent and may be held personally liable for debts incurred by the company if it trades while insolvent. This risk of personal liability deters directors from continuing to trade in times of financial distress and leads to companies being placed into external administration as soon as insolvency is suspected. It is therefore hoped that this proposed temporary relief measure will give businesses the confidence to continue to trade, and hopefully return to viability once the COVID-19 crisis is over.
It is important for Companies to be aware that this temporary relief does not affect the liability of the company to repay debts that it incurs in this period.
Additional flexibility under the Corporations Act
In order to provide increased regulatory certainty and flexibility to respond to the developing COVID-19 situation, the CERP Legislation also grants the Treasurer temporary power to amend provisions of the Corporations Act, to provide relief from or to amend statutory obligations.
The Treasurer will have this instrument-making power for 6 months and any instrument made by the Treasurer under this power will apply for up to 6 months from the date it is made.
This is in addition to the power that ASIC already has to offer relief from certain provisions in the Corporations Act or to refrain from taking action in relation to failures to comply with the Act.
Relaxation to the requirements for issuing Bankruptcy notices on Individuals
Ordinarily, where a debt is owed by an individual, under section 41 of the Bankruptcy Act 1966 (Cth), a creditor can request that the Official Receiver issue a bankruptcy notice to an individual if the creditor has obtained a final judgment or final order against the debtor for an amount of at least $5,000. The debtor then has 21 days after being served with the bankruptcy notice to respond to it, in the same way as a company served with a statutory demand.
The CERP legislation provides the following temporary changes to the bankruptcy regime:
An increase to the minimum debt amount from $5,000 to $20,000 before a creditor can request the Official Receiver issue a bankruptcy notice; and
The time for a debtor to respond to a bankruptcy notice is extended to 6 months from the usual 21 days.
These changes will apply for a 6 month period and apply to bankruptcy notices issued on or after the commencement of the CERP Legislation. A creditor is not prevented from being able to take other enforcement action against an individual through the courts at this time.
Extension of time of the Debtor’s Petition Protection
The temporary relief measures also extend the time frame for protection afforded to individuals seeking to voluntarily become bankrupt by presenting a debtor’s petition to the Official Receiver under section 55 of the Bankruptcy Act.
The debtor protection period (being the time afforded to a debtor in which unsecured creditors are not able to take various action to recover their debts) for presenting a debtor’s petition is temporarily extended from 21 days to 6 months.
This temporary measure will apply for 6 months and applies to petitions and declarations presented on or after the commencement of the CERP Legislation.
Relief from the ATO
The Government has indicated that the ATO will assist company directors or business owners that are struggling due to COVID-19 to find solutions, including offering temporary reduction of payments or deferrals, and withholding enforcement actions such as Director Penalty Notices and applications to wind up companies.
What this means for businesses
These short-term relief measures will no doubt provide some much-needed relief to businesses who have been forced to suspend trade or lost a significant part of their usual income in this time of crisis.
It is important for those who are fortunate enough to be able to continue to trade in these times to be cautious of the extent of credit they extend to their customers who may not be in a position to repay such accounts in the foreseeable future, if at all. Directors should not be mistaken in thinking that they are relieved from all personal liability under the Corporations Act beyond the insolvent trading provisions. There are no changes to the provisions concerning liability of directors for breaches of director duties generally. Directors should continue to seek advice and take guidance from their professional advisors on their duties and potential exposure as a result of COVID-19.
For advice suited to your particular situation please contact us.