In response to the current coronavirus pandemic, the Federal Government recently introduced a number of financial measures in its Coronavirus Economic Response Package Omnibus Act 2020 (Vic)(“the Act’).
Much of the Act deals with economic stimulus measures, such as stimulus payments and superannuation draw-downs, however Schedule 12 is entitled “Temporary relief for financially distressed individuals and businesses” and deals with three key areas of temporary reform which we will address in this article, being:
- changes to statutory demands against companies;
- changes to bankruptcy notices and procedure, and
- changes to a director’s liability for insolvent trading.
Prior to the Act coming into force, if a debt (or debts) totalling $2,000.00 or more were owed by a company, a creditor could issue a statutory demand to the company requiring payment of the debt. If the debt were not paid or the statutory demand set aside by a Court within 21 days, then the company would have committed an act of insolvency and could be wound up by a Court on the application of the creditor, based on a presumption that the company was insolvent.
For all statutory demands issued between 25 March 2020 and 24 September 2020, the Act now increases the minimum demand amount to $20,000.00 and also extends the time for compliance from 21 days to 6 months.
Creditors can still exercise their rights in relation to secured property, but unsecured creditors who obtain a judgment are unlikely to have many effective remedies in the short term, particularly if the debtor company does not own significant unencumbered assets.
Similarly, bankruptcy notices, which follow a similar process against individuals as statutory demands do for companies, have had the statutory minimum amount increased from $5,000.00 to $20,000.00 and the time for compliance extended from 21 days to 6 months.
Additionally, any sequestration (bankruptcy) petitions must be founded on a debt of at least $20,000.00 (regardless of whether a bankruptcy notice or some other act is relied upon to establish insolvency).
Finally, if a debtor makes a declaration of intention to present a debtor’s petition (voluntary bankruptcy), usually that debtor is protected from unsecured creditors taking action for a period of 21 days. This period has also been extended to six months.
The Corporation Act 2001 (Cth) makes directors of a company personally liable for debts incurred whilst the company was insolvent, subject to a number of pre-requisite criteria and any available defences. One of the amendments in recent years was to excuse directors from personal liability if, in general terms, it could be shown that debts were incurred by the company as part of a course of action that was reasonably likely to provide a better outcome for the company than immediately placing the company into external administration (known as the “safe harbour provisions”). This assessment can be difficult for directors at the best of times, but in the current rapidly changing economic landscape it is now an invidious task.
Accordingly, the Act now provides that directors will not be personally liable for debts incurred whilst the company was insolvent between 25 March 2020 and 24 September 2020 (and before an administrator or liquidator is appointed) provided that the debt was incurred in the ordinary course of business. The Explanatory Memorandum in relation to the Act provides that:
“A director is taken to incur a debt in the ordinary course of business if it is necessary to facilitate the continuation of the business during the six month period [commencing on 25 March 2020]”
This is a broad provision and, importantly, debts that are incurred for the sole purpose of changing the way the company does business may still qualify as being incurred “in the ordinary course of business”. For example, the Explanatory Memorandum specifically states that a director obtaining a loan to move some business operations online could be a debt incurred in the ordinary course of business, as could continuing to pay employees during the pandemic.
Critically, the former requirement that the course of action must be reasonably likely to provide a better outcome for the company than immediate external administration is not required to be met during this six month period.
That said, other duties of directors at common law and under the Corporations Act have not been modified or suspended, and still must be complied with by directors. These include the duty to act honestly, the duty to use care and diligence, and the duty not to use their position to cause detriment of the company.
How long will these provisions be in place?
It is not known whether the temporary changes made by the Act will be extended beyond the initial six month period, however this may occur depending on the course that the pandemic and the consequent economic effects that take in the months to come.
What is certain is that the above changes provide an increased impetus for creditors and debtors to negotiate to seek mutually acceptable resolutions to outstanding debts. In relation to director’s liabilities, the changes make it important for directors to make flexible but well-reasoned plans as to their business’ response to the current economic circumstances.
How can Sharrock Pitman Legal assist?
At Sharrock Pitman Legal, as Accredited Commercial Law and Commercial Litigation Specialists, we can provide you with commercially-focused legal advice to assist you to ensure that your business carries on and thrives in this new economic landscape. Please feel free to contact our Litigation team on 1300 205 506 or fill in the contact form below.
The information contained in this article is intended to be of a general nature only and should not be relied upon as legal advice. Any legal matters should be discussed specifically with one of our lawyers.
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Simon is a Senior Associate of Sharrock Pitman Legal.
He is an Accredited Commercial Litigation Specialist (accredited by the Law Institute of Victoria) and deals with Litigation, Mediation of Disputes, and Law for Charities & Not for Profits. For further information, contact Simon Matters on his direct line (03) 8561 3324.