Insight

New insolvency legislation changes give businesses breathing space

Matt Byrnes Matt Byrnes

With the world now in the midst of a global pandemic, businesses are facing disruptions across all aspects of their operations and in the marketplace.

These disruptions are challenging for everyone in different ways — but for some businesses, it means confronting a very stark reality: heading into the zone of insolvency for reasons outside their control.

In quick succession, we have seen a huge and, in some cases, the unprecedented commitment of support from government at both Federal and State level. The Federal Government has cast a wide net beyond tax measures, looking at ways to help businesses survive, including recent amendments to insolvency and corporations laws that provide temporary relief for directors of companies in financial distress.

The new measures, which will operate for six months unless further extended, specifically provide a blanket moratorium for directors in respect to insolvent trading liability for debts incurred in the ‘ordinary course of the company’s business’.

For many company directors, this will come as a welcome relief — with less immediate pressure to appoint an administrator or liquidator to protect their personal position. As a result of the measures, combined with positive steps taken by government, banks, lenders and the ATO to provide funding and cash flow support to businesses, it is expected that there will be less formal insolvencies in the short-term as businesses look to take every available step to stem the cash burn, take a breath and assess options.

What are the changes?

  • Temporary relief for directors from insolvent trading liability for the next 6 months (minimum)
    • In relation to debts incurred in the ordinary course of business
    • Applies to all companies
    • The company will still be liable for the debts incurred
    • Instances of dishonesty and fraud by directors will still be subject to criminal penalties
    • General directors’ duties under the Corporations Act and at common law still apply – i.e. to act in good faith and in the best interests of the company
  • The minimum threshold to issue a Statutory Demand will increase from $2,000 to $20,000
    • Companies will have 6 months to respond to a demand rather than 21 days – this effectively removes it as an immediate threat to enforcement
    • Companies still have an option to sue to recover a debt (although note availability, or lack of, of the Courts), and may also consider stop supply and other commercial measures to protect themselves
  • A temporary increase in the threshold for a creditor to initiate bankruptcy proceedings from $5,000 to $20,000
    • A debtor will have 6 months to respond rather than 21 days
    • The period of protection a debtor receives after making a declaration of intention to present a debtor’s petition will increase from 21 days to 6 months
  • Temporary flexibility in the Corporations Act 2001 for the Treasurer to provide targeted relief for companies from provisions of the Act to deal with unforeseen events that arise as a result of the Coronavirus health crisis

The ATO has indicated they will withhold enforcement actions including issuing Director Penalty Notices and winding up applications

Safe Harbour protection is more relevant than ever

Though these measures may seem to diminish the relevance of Safe Harbour provisions, the key elements of a Safe Harbour defence remain instructive to directors in the current climate.

Directors of a company, who meet certain requirements while developing and pursuing a course of action that is reasonably likely to lead to a better outcome, can benefit from Safe Harbour protection against personal liability from debts incurred by the company in connection with the course of action.

Five key elements for Safe Harbour

Directors should:

  1. Remain informed about the company’s financial position
  2. Take steps to prevent misconduct by officers or employees that could adversely affect the company’s ability to pay its debts
  3. Maintain appropriate financial records
  4. Develop and implement a plan
  5. Obtain advice from an appropriately qualified advisor

By taking proactive measures and getting expert advice to understand your options, businesses can ensure they are best placed to maximise outcomes.         

Subscribe to receive our publications

Subscribe now to be kept up-to-date with timely and relevant insights, unique to the nature of your business, your areas of interest and the industry in which you operate.