By Jennifer Ball - Partner, Restructuring & Insolvency, Clayton Utz
01 Apr 2020
The Government has announced that the amendments to the Corporations Act 2001 (Cth) and the Bankruptcy Act 1996 (Cth) will remain in place for six months from the commencement date, although the Act contemplates that they could operate for a longer period if prescribed. There is also power granted to the Treasurer for the changes to be extended for a further period of up to six months.
A new section 588GAAA has been inserted in the Corporations Act. This new temporary section provides directors with a new safe harbour “temporary relief due to coronavirus” from personal liability for any debts incurred by a business while insolvent. This relief will only apply to debts incurred in the ordinary course of the company’s business and during the six month period.
The relief will apply for six months from the commencement date, or longer if prescribed and the onus of establishing the protection of the new “temporary safe harbour” rests on the person seeking to rely upon the protection. The company will remain liable for all debts incurred.
Importantly, the existing provisions of the Corporations Act and the statutory defences already available, remain. Sections 1317S and 1318 provide that the court has power to grant relief from liability for breach of a civil penalty provision, which will include insolvent trading. A court may provide relief where a director may have acted honestly and, having regard to all the circumstances of a particular case, the director ought fairly be excused for their conduct. Cases of fraud and dishonesty will be subject to criminal proceedings.
It is very important to recognise that director’s duties (fiduciary, “care and diligence”, prohibitions against misleading and associated conduct) are not relieved under the amendments to the Corporations Act.
Accordingly, directors must be able to point to a continuing viable business during or at least by the end of the safe harbour. Continuing to trade a financially distressed company without purpose is not an option and would probably expose directors to personal liability under the relevant statutory provisions of the Corporations Act. It is important that directors and officers make themselves aware of those provisions, assess their financial position in a proactive manner and take advice from an experienced adviser early.
This is particularly so since businesses facing COVID-19-induced illiquidity may need to restructure and employ turnaround techniques and standstills; refinancing; cost outs and operating model redesigns. They will need to identify capital raising programs, debt facility alternatives, cost containment efforts, business operation re-orientation and major strategic changes (including around workforce).
The safe harbour provisions in section 588GA will remain an important consideration, mirroring, if possible, this new and temporary safe harbour. Accordingly, if the business is insolvent, or likely to become insolvent at any point of time, directors should still ensure they satisfy or explain why they are not able to satisfy the preconditions to safe harbour protections, including to record the strategy in a written plan.
Two amendments will be made to the Corporations Act in respect of statutory demands. First, the statutory minimum for the issuing of a statutory demand will be increased from $2,000 to $20,000: section 9.
Second, the period for compliance with a statutory demand is temporarily extended from 21 days to six months: section 459F.
These changes will occur by inserting new definitions in section 9 and amending sections 459E, 459F and 459G to refer to the new defined terms. Importantly they will only apply to statutory demands served on or after the commencement of the changes which are designed to be repealed six months after commencement.
Two amendments will be made to Bankruptcy Act 1966 (Cth) in respect of bankruptcy notices. First, the judgment amount at which an Official Receiver can issue a bankruptcy notice against an individual will be increased from $5,000 to $20,000: section 41(1).
Second, the period for compliance with a bankruptcy notice has been temporarily extended from 21 days to six months: section 40(1)(g).
These changes will occur by inserting new definitions in section 5(1) and amending sections 33, 40, 41, 42, 44 and 244 to refer to the new defined terms. These changes, similar to the corporation statutory demand amendments, will apply only to bankruptcy notices issued on or after the commencement date and are designed to be replaced six months after commencement.
According to the fact sheet, the period of protection a debtor receives upon presenting a debtor’s petition from unsecured creditors taking action to recover debts will increase temporarily from 21 days to six months.
Creditors will still have the right to enforce debts through the courts.
ASIC is also considering a series of complementary steps designed to grant relief from certain regulatory compliance matters to accommodate COVID-19 scenarios. At this stage, relief (or a “no action” letter) would need to be applied for on an individual, case-by-case basis. Some of the areas where ASIC has indicated that relief would be considered (and we expect this list to expand over the coming months) include:
ACCC is working on guidance around market relief when dealing with distressed market concentrations; we will keep you updated. We anticipate also receiving FIRB updates in relation to foreign capital investments.
Taking advantage of the breathing space
Even with a six- month temporary relief from insolvent trading liability, businesses which trade without a properly considered and formulated recovery plan risk putting themselves in a perilous position and with limited recovery options once the period of temporary relief comes to an end, meaning the risk and inevitability of a formal insolvency process becomes very real.
In other words, this 6 month period should be viewed as a planning period to reassess a company’s financial position, business model, costs and expenses and to model what business conditions look like going forward. If done using traditional safe harbour techniques with specialist expert advisers, any risks of insolvent trading liability can also continue well beyond the six- month relief period.
It is also worth remembering that despite the temporary relief from insolvent trading liability, most businesses will see significant interruptions to their cash flow, in particular to payment of their book debts and receivables. This means that continuing to trade without a plan risks significantly worsening the position, particularly given the temporary changes to the statutory demand process (extending the debt threshold from $2,000 to $20,000 and the time period for compliance from 21 days to six months), which is typically used as a debt collection tool.
A plan would be expected to incorporate, at least, these features:
For more information and the latest updates from Clayton Utz, visit https://www.claytonutz.com/knowledge
Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.
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