Relief for individuals and Businesses during the Covid-19 era

Relief for individuals and Businesses during the Covid-19 era

Whilst the world watches on at the shocking impacts of the COVID-19 pandemic (Covid-19), people are quickly becoming aware of the harsh realities that many face, both now and in the years to come.

Individuals and businesses who are financially distressed due to the impacts of Covid-19 have recently been met with temporary relief thanks to amendments made to both the Bankruptcy Act 1966 (the Bankruptcy Act) and the Corporations Act 2001 (the Corporations Act).

On 24 March 2020, Royal Assent was given to the Coronavirus Economic Response Package Omnibus Act 2020 (Cth) (the Act), with the Act being passed by both Houses of Parliament on 23 March 2020. The Act outlines the relevant amendments made to both the Bankruptcy Act and the Corporations Act and provides changes to bankruptcy proceedings (individuals) and statutory demands (companies).

BANKRUPTCY NOTICES & PROCEEDINGS

A bankruptcy notice is a formal demand for payment based on a final judgment or order of the court. Before the Act came into force, individuals were required to respond to the bankruptcy notice within 21 days, failing which they were committing an act of bankruptcy. The creditor then has the right to make the individual bankrupt by way of a creditor’s petition which is presented at court.

 Key Changes as set out in the Act

The key amendments to the Bankruptcy Act are outlined below:

  • The statutory minimum to issue a bankruptcy notice has increased from $5,000.00 to $20,000.00;[1]
  • The statutory period for the debtor to respond to the bankruptcy notice has increased from 21 days to 6 months;[2]
  • The amendments are repealed at the end of the period of 6 months starting on 25 March 2020[3]; and
  • If the debtor is served with the bankruptcy notice in Australia, the bankruptcy notice must specify that the period for compliance is 6 months from the date that the debtor is served.

Impact of the Act on Individuals

Individuals who are issued with a bankruptcy notice now have a 6-month protection period whereby they are not obliged to comply with the bankruptcy notice. This allows an extended period of time for debtors to seek financial advice, negotiate a payment plan with the creditor and/or consider formal insolvency options.

For creditors, these changes make it difficult and significantly less useful to issue a bankruptcy notice due to the extended period that individuals are now afforded to comply with the notice. During this time, creditors are encouraged to re-consider alternative methods of enforcement if they do not wish to wait the 6-month period to recover monies owing.

 

CREDITOR’S STATUTORY DEMAND FOR PAYMENT OF DEBT (“statutory demand”)

A statutory demand is a written demand which is served by a creditor on the debtor company pursuant to section 459E of the Corporations Act.[4] Ordinarily, the debtor company would have 21 days to respond to the statutory demand, failing which it is presumed insolvent and the creditor has the right to make an application to wind up the debtor company.[5]

Key Changes as set out in the Act

The most significant amendments to the Corporations Act and the Corporations Regulations 2001 (the Corporations Regulations) are as follows;

  • The statutory minimum to issue a statutory demand has increased from $2,000.00 to $20,000.00;[6]
  • The statutory period for the debtor company to respond to the statutory demand has increased from 21 days to 6 months;[7]
  • The amendments are repealed at the end of the period of 6 months starting on 25 March 2020; [8] and
  • The wording in Form 509H, being the statutory demand must be amended so that it complies with Schedule 12, part 2 of the Act.[9]

It is important to note that the Act provides for legislative changes to come into play the day after the Act received the Royal Assent. This means that if a statutory demand was served on a company on or before 25 March 2020, the Act would not apply and the company would have 21 days to respond to the statutory demand. Furthermore, the amendments made to the Corporations Act only apply to statutory demands that are served on or after the commencement of the Act.[10]


Impact of the Act on Businesses

Likely one of the biggest impacts of these changes will be a large reduction in the use of statutory demands by creditors who believe there is a debt due and payable by the debtor company.

We may see a shift towards more creditors using other court processes, i.e. issuing a statement of claim, which is normally viewed as a more timely and expensive process.

The difference for debtor companies is that they will have an extended period of time to comply with the statutory demand. Short term, these changes will provide breathing space for debtor companies and an opportunity to re-evaluate their financial situation and options moving forward. The long-term effects however remain unknown.


HOW CAN WE HELP?

Whether you are a creditor or a debtor, JHK Legal can assist you with any queries you may have in relation to the proposed changes of the Corporations Act and the Bankruptcy Act. Our solicitors are well versed in all legislative changes and are able to provide legal advice based on your specific circumstances.

JHK has extensive knowledge in the area of insolvency and can assist in all areas including statutory demands and bankruptcy proceedings, as well as general enquiries you might have.

If you are based in New South Wales, please don’t hesitate to call our Sydney office on (02) 8239 9600 for further information.

Written by Anna Hendriks, Lawyer

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[1] Bankruptcy Regulations 1996 (Cth) s 4.02AA(1).

[2] Bankruptcy Regulations 1996 (Cth) s 4.02AA(2).

[3] Bankruptcy Regulations 1996 (Cth) ss 4.02AA(3), 4.10A.

[4] Corporations Act 2001 s 459E.

[5] Corporations Act 2001 s  s459C(2)(a) and s459P.

[6] Corporations Regulations 2001 (Cth) s 5.4.01AA(1).

[7] Corporations Regulations 2001 (Cth) s 5.4.01AA(2).

[8] Corporations Regulations 2001 (Cth) s 5.4.01AA(3).

[9] Coronavirus Economic Response Package Omnibus Act 2020 (Cth) s 1669

[10] Coronavirus Economic Response Package Omnibus Act 2020 (Cth) s 1669.

Temporary Changes to Safe Harbour Provisions

Covid19 has seen sudden and unforeseen changes to the way in which business is conducted in Australia and globally. We have seen some businesses readily adapt and transition into new ways of trading, but others have been left feeling the financial crush of no longer able to continue as “business as usual” for the foreseeable future. As a result, many companies and directors are having to consider the operation of the insolvent trading provisions, and specifically the “safe harbour” provisions of the Corporations Act 2001 (Cth) (“the Act”).

Temporary amendments to legislation impacting companies has evolved seemingly on a daily basis. Accordingly, it is more important now than ever before for directors to keep abreast of these critical changes given the effects to their personal liability.

This article briefly summarises the recent changes to the safe harbour provisions ensuring directors are:

  • Aware of changes to statutory protections;
  • Able to remain compliant with statutory obligations; and
  • Access and utilise temporary measures available to assist in appropriately operating a company through the pandemic.

Existing Safe Harbour Provisions – Section 588GA of the Corporations Act 2001 (Cth)

The existing safe harbour provisions outlined in section 588GA of the Corporations Act 2001 (Cth) (“the Act”) provide protection for directors in their taking a course of action reasonably likely to lead to a better outcome for a company. In order for the safe harbour to apply, the debt incurred by the company needs to be ‘directly or indirectly’ in connection with that course of action taken by the director.

Importantly, the reasonableness of a course of action is to be considered contextually. However, the factors likely to be taken into consideration by a Court in determining the reasonableness include but are not limited to steps taken to:

  • inform themselves of the company’s financial position;
  • ensure proper financial records are maintained;
  • restructure the company to improve the financial position;
  • prevent misconduct by company officers and employees adversely affect the company’s ability to pay its creditors and debts;
  • obtaining appropriate advice from qualified persons (for example lawyers, accountants and/or financial advisors);

Critically, directors may not be able to rely on the safe harbour provisions in section 588GA of the Act if at the time the debt is incurred the Company is in arrears of its usual obligations including its taxation reporting obligations and/or employee entitlements.

Coronavirus Economic Response Package Omnibus Act 2020 (Cth) (COVID Act) (“the CERPO Act”)

The introduction of the Coronavirus Economic Response Package Omnibus Act 2020 (Cth) (COVID Act) (“the CERPO Act”) has bolstered the existing safe harbour provisions.

The CERPO Act has temporarily amended the safe harbour provisions for company directors and the duty to prevent insolvent trading. Effective from 25 March 2020, section 588GAAA of the CERPO Act now provides an additional ‘safe harbour’ from insolvent trading liabilities for debts that were incurred during the 6 months beginning 25 March 2020 in the ordinary course of the company’s business.

This additional measure will provide much needed relief and reprieve to company’s and their directors dealing with unprecedented changes to business and operating conditions and provides an attractive opportunity of time to properly assess a company’s financial position before otherwise pursing an insolvency administration.

What does this change look like in practice?

The introduction of this temporary measure is by no means a “green light” for directors to engage in or undertake transactions or risks.

It has been introduced specifically to protect necessary transactions or debts incurred to “…facilitate the continuation of the business during the six month period…”. This means, the protection only presently lasts from 25 March 2020 to 25 September 2020.

Whilst it is unclear as to exactly what will constitute a debt incurred “in the ordinary course of business”, the explanatory memorandum implies that the “ordinary course” may be considered widely and more broadly than before: that is to say, it could capture diversifying outside existing operations (for example production of new products). Further examples include loans taken out to facilitate continued operations, introduce/streamline technological integration, adapt production processes and/or pay employees will likely fall within the scope of the new temporary measures.

Importantly, these new temporary measures differ from existing safe harbour protections in that the exemption from insolvent trading is not preconditioned on the compliance with taxation reporting lodgements or employee entitlements being up to date. However, it is clear that the evidentiary burden of proving the debt will rest squarely with directors to demonstrate whether the debt(s) were reasonably incurred

Duties and penalties to remain

Notwithstanding these measures, directors must be mindful that:

  • This new temporary safe harbour provision does not change a director’s duties owed to the company itself in a period where the company is reasonably suspected to be or is already trading insolvently;
  • While a debt may be reasonably incurred in accordance with these provisions, directors still owe a due to consider the impact of the debts on creditors;
  • Other directors’ duties and liabilities will remain in place (for example personal liability attaching to unpaid taxation liabilities, uncommercial transactions, unfair loans and unreasonable director related transactions).

Considering utilising the Safe Harbour Provisions

It is clear that this provision has been introduced to provide avenues or options to companies and their directors facing times of financial uncertainty, who would otherwise be faced with having to make decisions on more serious measures including voluntary administration or liquidation.

However, reliance on these safe harbour provisions should be used only in appropriate circumstances. Transactions during the temporary period should only be undertaken with reference to proper financial and legal advice.

If you are a company director considering using the safe harbour provisions, we strongly urge you to seek timely legal advice, before entering the transaction or incurring any debt.

How we can help you

JHK Legal’s insolvency team can assist in respect of all changes to the Corporations Act (Cth) 2001 and all associated legislation, including advising on transactions and referring to reputable advisors. If you consider this advice relevant to your circumstances, please call us on 07 3859 4500  or Contact us to discuss how we may be able to assist.

Written by Kate Witt, Lawyer

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