COVID-19 | Emergency Amendments to Insolvency Laws

Government moves to amend insolvency laws

The Commonwealth Government announced a range of temporary amendments to certain insolvency laws as part of its economic response to COVID-19. The amendments will temporarily affect insolvency laws, corporate governance, and directors’ duties.

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

The changes below were introduced into Parliament on Monday, 23 March as part of the Coronavirus Economic Response Package Omnibus Bill 2020 (Bill) through Schedule 12. As Treasurer Josh Frydenberg announced, that Bill has now passed. Most of the measures introduced through the Coronavirus Economic Response Package Omnibus Act 2020 (Act), including those contained in Schedule 12, will commence the day after the Act receives Royal Assent. Going forward, further temporary amendments to corporations and insolvency laws may be introduced by way of powers to be given to the Treasurer.

Importantly, the Act will not have retroactive effect and these changes will not alter or invalidate bankruptcy notices that have been issued or statutory demands that have been served.

What has changed?

1. 1. Statutory demands: the minimum threshold to issue a statutory demand has been increased to $20,000 (from $2,000) and the time to respond to a statutory demand has been increased to 6 months (from 21 days). This amendment will apply for 6 months after Royal Assent is received.
   2. Bankruptcy notices: the minimum threshold to issue a bankruptcy notice has been increased to $20,000 (from $5,000) and the time to respond to a bankruptcy notice has been increased to 6 months (from 21 days). This amendment will apply for 6 months after Royal Assent is received.
   3. Insolvent trading: there will be a new “safe harbour” provision in the Corporations Act 2001 (new section 588GAAA) under which directors will be 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 will still be subject to criminal penalties. The company will remain liable for all debts incurred.
   4. Instrument-making power: the Treasurer will be given a temporary instrument-making power to temporarily amend provisions of the Corporations Act 2001 (Cth). Any instrument the Treasurer makes will apply for six months after Royal Assent is received. This is intended to speed up the Commonwealth Government’s response in relation to insolvency laws without the need to pass further legislation. We anticipate this power may be used to amend requirements in relation to the conduct of meetings and other procedural matters which will be affected by the impact of COVID-19 on usual business practices.
   5. ATO forbearance: the ATO proposes to tailor solutions for COVID-19 affected businesses. This includes temporary reduction of payments or deferrals, or withholding enforcement action (including Director Penalty Notices and wind-ups). At this stage it is unclear what precise form this ATO relief will take.

What has not changed?

1. 1. Voluntary administration: there is no change to the voluntary administration process at this point in time.
   2. Debt recovery: there is no change to the ability of creditors to bring debt recovery proceedings through the Courts (subject to Court hearing procedures and availability, which have also been impacted).

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

Authored by:

James Roland, Partner
Scott Couper, Partner
Nicholas McKenzie-McHarg, Partner
Clementine Woodhouse, Senior Associate
Natalie McCabe, Senior Associate