The COVID-19 Economic Response Package, providing financially distressed businesses with temporary relief

The Australian Parliament has passed the Coronavirus Economic Response Package Omnibus Bill 2020 (Cth). The legislation contains amendments to various laws, which are intended to reduce the threat that Australian businesses will collapse as a result of cash flow constraints resulting from the economic impacts of the COVID-19 crisis.

Personal Insolvency: Bankruptcy Notices

Previously, creditors could issue and serve a bankruptcy notice on an individual debtor of an amount of at least $5,000.00 (AUD). A response would then be required to the bankruptcy notice within the period of 21-days from the date of service of the notice. Failing a response, a creditor could initiate legal proceedings to seek the individual debtor’s bankruptcy on the ground that the debtor had committed an act of bankruptcy.

Under the temporary amendments passed by the Parliament, the time limit for a response to a bankruptcy notice has been extended to 6 months (rather than 21-days), and the monetary threshold for the issuance of a bankruptcy notice has been increased to $20,000.00 (AUD) (up from $5,000.00).

Additionally, the temporary amendments now provide that where an individual debtor elects to voluntarily apply for bankruptcy, unsecured creditors cannot take further action against them for the period of 6 months (up from 21-days).

Corporate Insolvency: Statutory Demands

Previously, a creditor could serve a statutory demand under the Corporations Act upon a corporate debtor, for an amount of at least $2,000.00 (AUD). Failing a response within 21-days from the date of service of the demand, the corporate debtor would be “deemed insolvent”, and a creditor could apply to the Court for an order for the winding up of the corporate debtor.

Under the temporary amendments, the monetary threshold has increased to $20,000.00 (AUD) (up from $2,000.00), and the time period requiring a response extended to 6 months (up from 21-days).

Personal Liability of Company Directors for Insolvent Trading

There is a duty upon company directors to prevent insolvent trading.

The scope of the duty is that a company must not incur a debt when it is insolvent (or is made insolvent by virtue of incurring a debt) at a time when a director of the company had reasonable grounds for suspecting that the company was insolvent or would become insolvent by virtue of incurring a debt.

Under the amendments, company directors will be temporarily relieved from their obligations to prevent insolvent trading, provided that debts are incurred in the company’s “ordinary course of business”.

Whilst welcomed, the amendments are limited and only temporary

The amendments are only intended as a temporary step to easing the economic burden upon businesses; they only apply to debts incurred in the next 6 months, such that they do not apply retrospectively to debts already incurred.

The amendments also do not, for example, impose any moratorium upon creditors’ ability to commence Court action to recover debts, nor diminish rights under a contract for a party to enforce any security or discontinue the supply of goods or services.