Businesses will get relief with changes to the bankruptcy laws but directors need to be aware that their duties remain in place and a business that is failing may not be saved by these changes.
Directors who continue to trade a distressed company without good prospects of recovery are exposing themselves to personal liability.
As a part of the Government’s stimulus measures, company directors will have a six month relief period from their obligations to prevent their companies trading while insolvent only if the debts are incurred in the company’s ordinary course of business.
The new measures increase the minimum for a creditor to issue a statutory demand to a company from $2000 to $20,000. Companies now have 6 months to respond to statutory demands instead of the usual 21 days.
The Coronavirus Economic Response Package Omnibus Bill 2020 (Economic Response Bill) was passed in Parliament and received Royal Assent on 24 March 2020. The provisions came into effect on 25 March 2020 and will remain in place for six months.
Treasurer Josh Frydenberg says: “(The measures are) a new regulatory shield that we are providing to directors and to businesses by changing insolvency and bankruptcy laws and the Corporations Act and will help get these businesses to the other side by trading through this very, very difficult period.
There is additional flexibility in the Corporations Act 2001 for the Treasurer to provide relief for companies from provisions of the Act for six months if effected by COVID-19.
Temporary changes have been made to the Australian Securities and Investments Commission (ASIC) enforcement powers. If companies make individual requests, ASIC can offer relief from provisions or cease action for noncompliance.
The Bill mandates that directors are able to incur a debt if it is necessary to facilitate the continuation of the business during the six month period that begins on commencement of the subparagraph.
The explanatory memorandum says: “This could include, for example, a director taking out a loan to move some business operations online. It could also include debts incurred through continuing to pay employees during the Coronavirus pandemic.”
Despite this, directors may still face criminal penalties if debts are incurred dishonestly or fraudulently during this period.
Law firm Clayton Utz notes: “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.”
In addition, law firm Maddocks says the reforms that impact directors do not consider the position where a company was insolvent or on the brink of insolvency before these reforms commence.
“On one view of it, there will be a significant increase in ‘zombie’ companies who will continue to trade (albeit in a limited capacity given the current restrictions).”
Clayton Utz says despite the six month relief from insolvent trading liability, businesses that continue to trade without a considered recovery plan put themselves at high risk of a formal insolvency process when the relief ends.
“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.”
“This six 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.”