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The Australian Federal Government has announced temporary amendments to insolvency and bankruptcy laws, effective from 25 March 2020, to lessen the economic impacts of COVID-19 on individuals and businesses and to allow for business continuity. The legislation passed is called the Coronavirus Economic Response Package Omnibus Act 2020 (Cth) (the COVID-19 Legislation).
The new measures are intended to avoid unnecessary bankruptcies and insolvencies by providing:
The temporary amendments that will apply for 6 months from 25 March 2020 until 24 September 2020 include:
Statutory Demands (companies)
A failure to respond to a statutory demand creates a presumption of insolvency under the Act, and the company may be placed into liquidation. The Government has temporarily increased the timeframe for a company to respond to a statutory demand from 21 days to 6 months, thereby lessening the threat of actions that could push a business into insolvency.
The amendments will not prevent the right of creditors to enforce debts against companies or individuals through the courts. However, creditors will not be able to rely upon a failure to pay to commence winding up proceedings until the expiration of the 6 month period, if the statutory demand is served on or after 25 March 2020.
Insolvent Trading (companies)
The introduction of a new section 588GAAA into the Act provides temporary relief to directors from personal liability for insolvent trading in respect of debts that are incurred by their company if the debt is incurred:
According to the Explanatory Memorandum to the COVID-19 Legislation, a director is taken to incur a debt in the “ordinary course of the company’s business” if it is necessary to facilitate the continuation of the business during the 6 month period. This could include a director taking out a loan to move some of the business operations online or incurring the debt to pay employees during the COVID-19 pandemic.
While the new provision of the Act provides protection during the 6 month period, a person wishing to rely on the temporary safe harbour in a court proceeding in which unlawful insolvent trading is alleged will bear an evidential burden in relation to that matter. This means producing evidence to support their reliance on the temporary safe harbour.
A holding company may also rely on the temporary safe harbour provisions for insolvent trading by its subsidiary if it takes reasonable steps to ensure the temporary safe harbour applies to each of the directors of the subsidiary, and to the debt, and if the temporary safe harbour does in fact apply as a matter of law. The holding company must establish this by producing evidence to support their reliance on the temporary safe harbour.
Bankruptcy Proceedings (Individuals)
To assist individuals, the Government has made a number of changes to the personal insolvency system regulated by the Bankruptcy Act 1966 (Cth). These include:
These temporary measures will apply for 6 months from 25 March 2020 until 24 September 2020.
Temporary Powers given to the Treasurer
The COVID-19 Legislation enables the Treasurer to provide short term regulatory relief to classes of persons that are unable to meet their obligations under the Act or the Corporations Regulations 2001 (Cth) by:
The Treasurer can exercise this power if they are satisfied that it would not be reasonable to expect the persons in the class to comply with provisions because of the impact of COVID-19, or the exemption or modification is otherwise necessary or appropriate in order to facilitate continuation of business in circumstances relating to COVID-19, or to mitigate the economic impact of COVID-19.
This is a temporary provision to facilitate the continuation of business during the coronavirus.
For specific legal advice regarding the new safe harbour provisions, including regarding issuing or responding to a demand to or from your creditors or debtors, please contact Leanne Allison or Cameron Sutton.