On 22 March 2020, the Australian Federal Government announced its plans to make temporary changes to the corporations and insolvency laws amidst the expected difficulties and challenges to be faced by businesses in light of the COVID-19 pandemic. The changes are intended to limit the liability of directors for insolvent trading where debts are incurred in the ordinary course of business, as well as measures to give corporate entities more time to comply with statutory demands.

Company insolvency measures

1. For directors, these changes will provide temporary relief for trading whilst insolvent

The COVID Act inserts section 588GAAA into the Corporations Act 2001 (the Act), “Safe Harbour—Temporary Relief in response to the Coronavirus“. Under this section a director will not be personally liable for insolvent trading in respect of a debt incurred:

  • in the ordinary course of the company’s business; and
  • during the six-month period starting on the day the section commences (or any longer prescribed by the regulations).

During the prescribed six-month time frame, directors will be relieved of the risk of a personal liability for insolvent trading, with respect to debt incurred in the ordinary course of the company’s business.

Directors should be mindful that other directors’ liabilities under the Act, and generally, have not otherwise been amended.

It is important to note that while the personal liability for insolvent trading will be limited, directors will still be liable for the debts incurred by dishonest and fraudulent means, being criminal offences. Also, consideration needs to be given to whether the debt was incurred in the ordinary course of business.

2. Statutory Demands

The minimum threshold at which creditors can issue a statutory demand will change from the current amount of $2,000 to $20,000. This will apply for a period of 6 months. Additionally, companies will now have 6 months to respond to a statutory demand, rather than the previous 21 days.

The amendments to the Act will only apply to statutory demands issued on or after 25 March 2020 and will not apply retrospectively. 

The amendments to the Act will only apply for six months starting 25 March 2020, unless that period is extended.

Corporations Act temporary mechanism

Part 9.11 of the Corporations Act establishes a temporary regime to provide relief to classes of persons who, for one of the reasons outlined below, are unable to meet their obligations under the Corporations Act. The Treasurer can provide by powers conferred on him.

Classes of persons have not been identified specifically identified, which gives flexibility to the Treasurer to provide relief to various persons who are subject to the Corporations Act. This power is available from 25 March 2020 for a maximum of 6 months, and is available where the Treasurer is satisfied that:

  1. It would not be reasonable to expect the persons in the class to comply with the provisions; or
  2. The exemption or modification is necessary or appropriate, in circumstances relating to COVID-19, to facilitate continuation of business or to mitigate the economic impact of the coronavirus.

Certain classes of businesses, irrelevant of size, may accordingly obtain some kind of relief from Corporations Act obligations, such as financial reporting requirements, where the Treasurer determines it is reasonable, necessary or appropriate.

Individuals insolvency measures

  1. In relation to bankruptcy proceedings, bankruptcy notices can only be issued for debts exceeding $20,000, instead of the current $5,000 threshold. This will last for a period of 6 months. Additionally, debtors will have 6 months to respond to a bankruptcy notice, as opposed to 21 days.
  2. The amendments propose to extend the period of protection a debtor receives after making a declaration of intention to present a debtor’s petition, from the current 21 days to 6 months.

ATO Dialogue

In response to the economic impact of COVID-19, the Australian Taxation Office is offering to assist businesses in reaching arrangements during these challenging times. The options available to businesses include the following:

  1. Temporary reduction of payments or deferrals
  2. Withholding enforcement actions such as Director Penalty notices and windups
  3. Remitting any interest and penalties, incurred on or after 23 January 2020, that have been applied to tax liabilities
  4. Allowing businesses to enter low interest payment plans to pay existing and ongoing tax liabilities
  5. Deferring the payment date of amounts due through the business activity statement (including PAYG instalments), income tax assessments, fringe benefits tax assessments and excise, by up to 6 months
  6. Allow businesses on a quarterly reporting cycle to opt into monthly GST reporting in order to get quicker access to GST refunds they may be entitled to
  7. Allowing businesses to vary PAYG instalment amounts to zero for the March 2020 quarter. Businesses that vary their PAYG instalment to zero can also claim a refund for any instalments made for the September 2019 and December 2019 quarters

Temporary power given to Treasurer

The Federal Government will be giving the Treasurer a temporary instrument making power under the Corporations Act 2001, for a period of 6 months, to provide relief to companies from certain provisions and to modify obligations, to be able to deal with unforeseen events arising from the detrimental impact of COVID-19. It is vital to note that any relief granted by the Treasurer during this crisis will last 6 months from when the power was exercised.  

Birchgrove Legal

If you require more information on the above matters, please contact us to discuss.