The Federal Government has recently introduced the Coronavirus Economic Response Package Omnibus Bill 2020 (Bill), which was passed by both Houses of Parliament on 23 March 2020.
Schedule 12 of the Bill will provide relief to individuals and businesses facing financial distress due to the COVID-19 crisis by effecting temporary changes to the Corporations Act 2001 (Cth) (Corporations Act), the Bankruptcy Act 1966 (Cth) (Bankruptcy Act) and the regulations to those Acts.
Schedule 8 of the Bill will also empower the Federal Treasurer to make further temporary changes to the Corporations Act to mitigate against further harm that may arise from the COVID-19 crisis.
Below is a summary of the key changes that will be effected by the Bill when it passes into law.
Summary of Temporarily Relief for Financially Distressed Businesses
- Statutory Demands – There will be a temporary increase to the minimum threshold for creditors issuing statutory demands against debtor companies from $2,000 to $20,000. A company in receipt of a statutory demand will have 6 months to respond to a statutory demand instead of the usual 21 day period.
- Insolvent Trading – Company directors will temporarily be relieved of their duty to prevent insolvent trading pursuant to Section 588G of the Corporations Act as long as they incur company debts in the ordinary course of business. What constitutes the “ordinary course of business” will necessarily be a broad concept. Of course, cases of dishonesty and fraud by company directors will still be subject to criminal penalties.
- Bankruptcy – There will be a temporary increase to the minimum threshold for a creditor to initiate bankruptcy proceedings against an individual debtor from $5,000 to $20,000. A debtor served with a Bankruptcy Notice will have 6 months to respond to that notice instead of the usual 21 day period.
The period of protection against the claims of unsecured creditors that arise when a debtor declares an intention to enter voluntary bankruptcy will also be extended from 21 days to 6 months.
All of the above temporary changes will apply for a period of 6 months.
Importantly, none of the above changes will come into effect until the Bill is passed into law. For example, the amendments to the Corporations Act and its regulations in relation to statutory demands apply only to statutory demands that are served on or after the commencement of the relevant Bill provisions.
None of the temporary changes will prevent creditors from enforcing their debts against companies or individuals through the Courts. In other words, you can still sue a debtor company or individual to recover outstanding debts.
It remains to be seen what impact this will have on creditors who like many, will need to recover debts in order to generate sufficient cash flow to survive themselves. Creditors may decide to commence Court proceedings rather than wait 6 months. There may well be a tightening of credit terms between suppliers and buyers of goods and services as a consequence and quite possibly, a significant shift from credit terms to COD supply arrangements only.
Interestingly, the Federal Treasurer will be given a temporary instrument making power under the Corporations Act. This new power will allow the Treasurer to temporarily amend provisions of the Corporations Act or its regulations to exempt individuals and classes of persons from complying with specific provisions of the Corporations Act or its regulations during the COVID-19 crisis.
Any instrument made pursuant to the Federal Treasurer’s temporary instrument-making power will apply for up to 6 months from the date it is made.
The Federal Treasurer’s new temporary instrument making power is a welcomed development. This new power will grant the flexibility required for the Federal Treasurer to respond to the developing COVID-19 crisis.
For owners or directors of businesses that are currently struggling, the Australian Taxation Office is offering to tailor solutions to their businesses, including temporary reduction of payments or deferrals, or withholding enforcement actions including Director Penalty Notices and wind-ups.
Russell Kennedy will be monitoring these developments and provide further updates.
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If you require further information, please call Walter MacCallum (Sydney) on 0417 771 535, Rory Maguire (Melbourne) on 03 8602 7246, Nahum Ayliffe (Melbourne) on 0413 022 940, Joe Denina (Sydney) on (02) 8987 0029 or a member of our Corporate and Commercial team.
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