Temporary relief for financially distressed companies

As part of the its efforts to stem the effects of the COVID-19 pandemic on the Australian economy, the Federal Government has recently introduced a number of ‘safety net’ provisions designed to avoid financially distressed individuals and companies being forced into, respectively, bankruptcy and liquidation. 

The objective is to allow them to continue trading where possible.  

The reforms

The reforms announced by the Federal Government are contained in the ‘Coronavirus Economic Response Package Omnibus Act 2020’ (Act). The Act has now passed both houses of Parliament and has received royal assent. The most important reforms are as follows: 

1. for individuals:

• a temporary increase of the statutory minimum amount owed in order for a creditor to issue a bankruptcy notice, from $5,000 to $20,000;
• a temporary extension of the existing statutory period to respond to a bankruptcy notice from 21 days to six-months; 

2. for companies:

• a temporary increase of the statutory minimum amount owed in order for a creditor to issue a statutory demand, from $2,000 to $20,000; 
• a temporary extension of the time in which a company must respond to a statutory demand, from 21 days to six-months; 

3. for company directors: 

• temporary relief from personal liability arising from a company’s insolvent trading during a six-month period commencing on 25 March 2020.

The reforms will only apply for a period of six months, commencing from 25 March 2020. None of the reforms apply retrospectively and only apply to debts incurred during that six-month period unless that period is extended.

HopgoodGanim's comment

The reforms are limited and only designed to capture temporary liquidity crises which arise from COVID-19. For example, the reforms do not:

1. prevent a distressed individual from appointing a bankruptcy trustee or looking to the protection of Part IX or Part X of the Bankruptcy Act should he or she wish to do so;
2. prevent a distressed company from itself appointing a liquidator or administrator;
3. prevent banks and other secured creditors from exercising their rights over secured assets;
4. stop unsecured creditors for enforcing judgment debts or looking to more creative means to apply pressure upon distressed entities to pay their debts;
5. prevent parties to contracts with distressed entities (e.g. landlords) from terminating those contracts by reason of breach or repudiation; or
6. create any sort of moratoria on the exercise of contractual rights or remedies.

This means that distressed individuals and companies are still vulnerable to attack from many creditors and other stakeholders who may be minded to pursue their claims.

From a practical perspective, the reforms do not:

1. restore lost income or depleted assets;
2. prevent debts and liabilities accruing over the six-months whilst the reforms are in place; or
3. provide any sort of “get out of jail” free card.

This means that, for many distressed individuals and companies, their problems are merely kicked down the road (and indeed compounded) over the six-month protection period, such that many will be forced to consider their insolvency options as that period comes to an end. Economic forces will cause the underlying health of distressed businesses to worsen and they will be exposed when the protection period comes to an end. 

In the case of companies and their directors, it appears the reforms will work in unison with, but are more limited than, the ‘safe harbour’ provisions in the Corporations Act, as:

1. the ‘safe harbour’ provisions apply to provide directors with temporary relief where a company is in ‘safe harbour’ and incurs debts in the ordinary course of the company’s business; and
2. the reforms, only apply in relation to debts which are incurred during the six-month window. 

If we have learned nothing else from this pandemic, it is that change moves quickly and in directions we don’t expect. State Governments and the Commonwealth will continue to act in response to the crisis and more protective measures are expected to be adopted in the coming weeks and months. 

Boards and individuals should continue to engage with, and seek advice from, their legal advisors about these matters especially given the quickly evolving landscape affecting Australia and the world.