COVID-19 Amendments to Australia’s Insolvency Regime

The Coronavirus Economic Response Package Omnibus Act 2020 (Cth) (Omnibus Act) amended the Corporations Act 2001 (Cth) (Act) and the Corporations Regulations 2001 (Cth) (Regulations) with effect from 25 March 2020 to create a “safety net” for Australian businesses facing COVID-19 related financial distress.

While intended for Australian businesses affected by COVID-19, unlike JobKeeper relief, there is no application or qualification process legislated with the corporate insolvency amendments although an evidential burden limits the application of relief relating to directors’ duties.

Statutory demands

Statutory demands issued under the Act served in the six months on or after 25 March 2020 must:

  • provide a date for compliance with the statutory demand of at least six months (instead of the previous 21 days) from the date of service; and
  • be for debts of at least $20,000 (instead of the previous $2,000 statutory minimum).

Form 509H has also been updated to reflect these amendments.

The 21-day deadline to apply to set aside a statutory demand has also been amended and an application to set aside a statutory demand served during the safety net period must be made within six months of service.

It is expected that these amendments will result in an inevitable increase in disputes about the genuineness of debts and the validity of statutory demands – noting in particular:

  • the technical and time-critical nature of the regime;
  • the possibility of conflict with or ambiguity arising from existing requirements in Court rules and practice notes; and
  • the length of time between issue and compliance, issues around any payments made by (and the existence of any plans entered into with) debtors.

Directors’ duties – Safe harbour

Australia’s safe harbour regime, which may provide a company director with protections against personal liability for insolvent trading claims in certain circumstances, has also been temporarily expanded and now applies:

  • to debts incurred in the ordinary course of the company’s business;
  • during a six month period from 25 March 2020 (OR any longer period prescribed in the Regulations) to the date of appointment of an Administrator, or Liquidator, of the company.

Company directors bear an evidential burden of showing the temporary COVID-19 safe harbour applies to them if they seek to plead it as a bar to any claim that they have contravened the insolvent trading laws. Directors will also only be able to rely on books and records and information to support their use of the COVID-19 safe harbour provided they have not failed to provide that material in the circumstances set out in the Act (eg when requested by a liquidator).

Company directors may still face criminal liability in cases of fraud or dishonesty and common law liability for any breaches of their duties as directors. Directors will also need to continue to comply with their obligations to consider the interests of creditors in the “grey zone” of insolvency (Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722).

While the other existing safe harbour requirements (for instance formulating a plan and documenting it, keeping up to date with tax and employee obligations, taking expert accounting or other appropriate advice) do not appear to be picked up in the temporary COVID-19 safe harbour, it would be prudent for directors to have regard to and comply with those actions (where possible) when attempting to take advantage of the COVID-19 safe harbour.

It is also important to note that the temporary relief applies only to insolvent trading claims. It does not for instance provide relief from shareholder claims and it provides no relief from the requirement to pay any debts incurred by the company according to the relevant terms.

Keeping this in mind may help directors considering entering into new company debt to manage or prevent some issues around “zombie” companies which have featured in recent discussion of the reforms.

As with insolvent trading generally, there will also remain all of the usual complications around new, existing, rollover, and other forms of debt and more sophisticated debt instruments and how those fit into the notion of a debt “incurred” during the relevant time.

A holding company of a company in financial distress may also be able to take advantage of the COVID-19 safe harbour provided it takes “reasonable steps” to ensure that the COVID-19 safe harbour applies in relation to each of the directors of the subsidiary company and to the relevant debt(s) AND the safe harbour does in fact apply (ie there is no safe harbour for a parent where the subsidiary has none).

The Omnibus Act received Royal Assent on 24 March 2020 and Schedule 12 Part 2 (Amendments relating to businesses in financial distress) commenced on 25 March 2020.

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