COVID-19 | Emergency Amendments to Insolvency Laws: What’s next?

In March, we reported that, as part of a suite of legislative and economic responses to COVID-19 the Commonwealth Government had announced a range of temporary amendments to certain insolvency laws. The amendments were aimed at temporarily amending insolvency laws, affecting in turn corporate governance, and directors’ duties.

The purpose of the amendments was to support otherwise viable businesses which temporarily suffered financial distress during initial stages of the COVID-19 crisis. The amendments initially restricted the threat of action being brought against companies and individuals by creditors which may unnecessarily push them into insolvency.

However, the reforms were a temporary measure and until today, (7 September 2020) were due to end on 24 September 2020. Whilst we speculated in March that further temporary amendments to corporations and insolvency laws may be introduced by way of powers to be given to the Treasurer, no further specific amendments were introduced.

What changed on 25 March 2020?

Here is a short summary of the March package:

Statutory demands: the minimum threshold to issue a statutory demand was increased to $20,000 (from $2,000) and the time to respond to a statutory demand was increased to 6 months (from 21 days).

Bankruptcy notices: the minimum threshold to issue a bankruptcy notice was increased to $20,000 (from $5,000) and the time to respond to a bankruptcy notice was increased to 6 months (from 21 days).

Insolvent trading: directors were temporarily relieved from personal liability for trading while insolvent – that is, where the company incurs debts in the ordinary course of the company’s business while it is insolvent. Instances involving dishonesty and fraud are still subject to criminal penalties. The company will remain liable for all debts incurred.

Instrument-making power: the Treasurer was given a temporary instrument-making power to temporarily amend provisions of the Corporations Act 2001 (Cth). Any instrument the Treasurer implemented would apply for six months. The intention of the granting of this power was to speed the Commonwealth Government’s response in relation to insolvency laws without the need to pass further legislation.

This power has been used to amend requirements in relation to the conduct of meetings and other procedural matters which have been affected by the impact of COVID-19 on usual business practices (e.g. alternatives to face-to-face meetings).

What other steps has the Commonwealth Government taken?

In addition to the above temporary measures, the Government introduced:

• JobKeeper (extended by Parliament on 1 September 2020);
• JobSeeker;
• the Coronavirus SME Guarantee Scheme; and
• support to financial institutions to enable them to continue to provide credit; and
• many other fiscal relief measures.

Further, the Australian Taxation Office implemented various initiatives to assist COVID-19 affected businesses, such as temporary reduction of payments or deferrals, and the delay or withholding of enforcement action.

The September “Cliff”?

Whilst economic stimulus and relief packages such as JobKeeper and JobSeeker have been extended, in modified form to March 2021 and beyond, until today, which is only two weeks prior to the temporary insolvency relief package being due to expire, there had been no such announcement in relation to the future of the package.

Today, however, Morrison Government announced that they will continue to provide regulatory relief for businesses that have been impacted by the COVID-19 crisis by extending temporary insolvency and bankruptcy protections until 31 December 2020.

We suspect that the Commonwealth Government found itself in a dilemma given the vastly different current status of Australia’s various state economies. Whilst Victoria remains in virtual lockdown, other States are swiftly emerging from initial personal and business restrictions. There is not a “one-size-fits-all” solution.

Whilst there was silence from the Commonwealth Government, certain organisations such as the Australian Institute of Credit Management and the Australian Reconstruction Insolvency and Turnaround Association have recently expressed concern that the current insolvency relief measures have artificially delayed corporate and personal insolvency rates. They anticipated that this delay would lead to a deluge of failing businesses after 25 September 2020.

Further, they argued, any extension of the package of measures will exacerbate the number of business that will most likely fail once the measures are terminated.

Now that the Commonwealth Government has taken the step to extend the temporary reliefs to 31 December 2020, it can be argued that the measures will further harm the providers of credit and services generally, be they landlords, suppliers of goods and services, debt, stock and equipment financiers, or credit providers generally. Many debtors, for good reasons in most cases, have relied on the protections afforded them by the insolvency relief package and have deferred meeting their contractual obligations during the pandemic,

Given the fact that:

1. 1. the above organisations strongly opposed any extension of these insolvency relief measures; and
   2. there had been little public agitation to retain them,

the temporary relief measures were thought likely to terminate on 24 September 2020. Without the protection, many businesses were fast approaching a day of reckoning.

Conclusion

Now that the insolvency relief measures have been extended, businesses need to use this period to be prepare for the return to business as usual, and should be actively assessing their viability on an on-going basis and preparing for the uncertainty ahead.

Seeking out professional advice and guidance to assist in either some financial engineering, or more formal restructuring will be part of that assessment.

For details of all our COVID-19 tips and updates, visit the Gadens COVID-19 Hub.

Authored by:

Rob Hinton, Partner