COVID-19: What are the changes to insolvency laws in Australia

In late March 2020 the Government enacted the Coronavirus Economic Response Package Omnibus Act 2020 (the Act) to provide an economic response, and deal with matters relating to COVID-19. This article summarises some of the changes introduced by the Act relating to personal bankruptcy, corporate insolvency and directors’ duties relating to insolvent trading.

Personal Bankruptcy

The Act amends the Bankruptcy Act 1966 (Cth) and Bankruptcy Regulations 1996 to provide temporary relief for individuals at risk of bankruptcy by providing temporarily for:

• an increase in the minimum amount of debt required to be owed before a creditor can initiate bankruptcy proceedings against an individual from $5,000 to $20,000; and
• an increase in the time to respond to a bankruptcy notice from 21 days to six months.

The changes affect bankruptcy notices issued on or after 25 March 2020. If the bankruptcy notice was issued before 25 March 2020, the old regime applies, and the debtor has 21 days to comply with the bankruptcy notice.

Corporate Insolvency

The Act amends the Corporations Act 2001 (Cth) and Corporations Regulations 2001 to provide temporary relief for businesses at risk of insolvency by providing temporarily for:

• an increase to the statutory minimum for a creditor to issue a statutory demand to a debtor from $2,000 to $20,000; and
• an increase in the time to respond to a statutory demand from 21 days to six months.

The amendments only apply to statutory demands served after 25 March 2020 and will only apply for six months unless that period is extended.

Insolvent Trading

The Act amends the Corporations Act 2001 (Cth) to provide temporary relief for directors from their personal duty to prevent insolvent trading. This is achieved by introducing a new temporary safe harbour from the duty to prevent insolvent trading. The changes provide that a director may rely on the temporary safe harbour in relation to a debt incurred by the company if:

• the debt is incurred in the ordinary course of the company’s business;
• the debt is incurred during the six month period starting on 25 March 2020, or a longer period as prescribed by the regulations; and
• the debt is incurred before any appointment of an administrator or liquidator of the company during the temporary safe harbour application period.

Directors will be taken to incur a debt in the ordinary course of business if they can show that the debt is necessary to facilitate the continuation of the business during the six month period. The explanatory memorandum for the Bill provides examples of debts incurred in the ordinary course of business such as:

• loans to move some business operations online; or
• debts incurred through continuing to pay employees during the Coronavirus pandemic.

Any debts incurred by the company will still be payable by the company.

It is important to note that the Act does not provide for any change in regards to directors’ duties, voidable transactions (including preference payments) or voluntary administration/liquidation appointments.

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