As a result of the Coronavirus Economic Response Package Omnibus Act 2020 (Cth), the Corporations Act 2001 (Cth) (Corporations Act) has been amended to provide temporary relief to directors of companies for insolvent trading during the COVID-19 pandemic. Certain provisions of the Corporations Act governing the issuing of, and compliance with, statutory demands have also been amended. The purpose of these amendments is to provide a safety net for businesses to allow them to navigate a temporary period of insolvency brought on by COVID-19 and to recover when economic growth picks up at the end of the pandemic.
Under the Corporations Act, creditors can issue statutory demands to debtors should the debtor be liable to pay a debt of $2,000 or greater. Debtors who receive a statutory demand have 21 days to respond to the statutory demand or risk the creditor commencing proceedings to wind up the debtor.
However, pursuant to the amendments introduced by the Coronavirus Economic Response Package Omnibus Act 2020:
- the minimum threshold at which creditors can issue a statutory demand to a debtor has increased to $20,000 (from the current minimum of $2,000); and
- debtors will have 6 months (rather than the current 21 days) to respond to statutory demands served on them.
This increased threshold and longer period for compliance will apply to all statutory demands served during the six-month period commencing on 25 March 2020.
While these amendments do not effect the ability of a creditor to sue for the recovery of a debt, they will likely lessen the impact and utility of issuing a statutory demand, which can be a cost effective and timely method of debt recovery. However, debtors will likely welcome the extra time afforded to comply with demands issued during the relevant six-month period.
Currently under section 588G of the Corporations Act, directors of companies will be personally liable if they fail to prevent their company from incurring debts while insolvent. However, the Corporations Act has now been amended to provide that section 588G will not apply, and directors will no longer be personally liable, in relation to any debts incurred in the ordinary course of the company’s business during the six-month period commencing on 25 March 2020.
The Explanatory Memorandum to the Coronavirus Economic Response Package Omnibus Act 2020 states that a debt is incurred in the ordinary course of business if it is necessary to facilitate the continuation of the business, and provides the following examples:
- a director taking out a loan to move some business operations online; or
- debts incurred through continuing to pay employees during the COVID-19 pandemic.
However, it is not currently clear what other specific debts will be covered by these amendments. It is worth noting that, if a company incurs a debt not in the ordinary course of its business, its directors may still be able to rely on the existing safe harbour provisions provided in the Corporations Act as a defence to insolvent trading. The existing safe harbour provisions provide that a director will not be personally liable for insolvent trading where they suspect that their company is insolvent and the company incurs a debt due to a course of action developed by the director that is reasonably likely to lead to a better outcome for the company. Directors should be aware that the safe harbour provisions apply to debts incurred prior to the onset of the COVID-19 pandemic, whereas the new amendments apply only to those debts incurred during the relevant six-month period commencing on 25 March 2020.
Director’s duties still apply
Although directors will not be liable for insolvent trading in the circumstances described above, these new amendments to the Corporations Act do not relieve directors from compliance with their director’s duties. Directors must still ensure that they comply with their statutory duties, such as the duties to act with due care and diligence and in the best interests of the company. Accordingly, it is likely that neither the new amendments or the existing safe harbour provisions will excuse directors from engaging in the risky or ill-advised incurring of debts.
If you have any questions or concerns in relation to potential insolvent trading, compliance with director’s duties or debts to be incurred or recovered, please do not hesitate to contact us.