The Treasurer, the Honourable Josh Frydenberg MP, has today announced proposed temporary changes to Australian corporate insolvency laws which will vary the minimum requirements for statutory demands and provide some relief for directors from insolvent trading. These announcements form part of the Australian Government's measures to support otherwise profitable and viable businesses due to the economic impacts of COVID-19.
At the time of writing, these changes are not yet law. Some at least will require legislative amendment, and Government policy in response to COVID-19 is subject to update at short notice. You should seek up to date advice in relation to these matters before acting on them.
Insolvency policy initiatives
The minimum total amount of debt required to issue a creditor's statutory demand to a company will be increased to A$20,000, with a creditor to be given 6 months to respond to the demand. These increases vary the current A$2,000 limit and 21 day timeframe. The changes will apply for a 6 month period.
Under current law, directors of an Australian company can face personal liability if they allow their company to trade while insolvent. Under these proposals, directors will be relieved from their duty to prevent insolvent trading, and from personal liability if they do allow a company to trade while insolvent, in respect of debts incurred in the ordinary course of business. This change will also apply for a 6 month period. Companies are not relieved from their obligations to pay debts and egregious cases of trading dishonestly or fraudulently will still be subject to criminal penalties.
Relief from other corporations law obligations foreshadowed
It is proposed that the Treasurer be given temporary instrument making power under the Corporations Act 2001 (Cth) (Corporations Act) to allow him to amend temporarily the Corporations Act to provide relief from specific obligations or to modify obligations to enable compliance with legal requirements during the crisis. The power will be in place for 6 months, and the relief granted will last 6 months from when the Treasurer exercises that power. This power would allow the Treasurer to make changes quickly whilst Parliament is not in session.
Specific examples of what may be intended have not yet been included in the releases by the Government, but might be expected to include relief from holding annual general meetings.
What business need to know
The reforms announced today are in addition to the measures recently announced by the Australian Government to respond to the economic impact of COVID-19 and are welcome as they respond to one avenue of potential debt enforcement and directors' personal liability flowing from the routine operation of a distressed business in uncertain times.
In practical terms, businesses should focus on cash preservation and generation to try to remain solvent (for instance, by focusing on operational streamlining, entering formal standstill or payment extension arrangements with creditors, and securing additional funding where possible). For a discussion of these issues see: COVID-19 Finance Considerations Australia.
Directors otherwise at risk of insolvent trading will still need to assess whether debts they intend to incur are within the concept of the "ordinary course of business". Where they are intending to engage in more substantial restructuring, they may still need to consider the safe harbour protections to avoid the risk of personal liability: Safe Harbour Reforms Australia. To take advantage of that exemption companies will still need to pay close attention to paying employee entitlements on time and taxation lodgement obligations.
The ATO is also encouraging businesses to engage with them to reach arrangements in respect of taxation obligations, to the extent that they are able to do so. Other measures announced by the Australian government to assist businesses impacted by COVID-19 are broad and include:
- deferring by up to six months the payment date of amounts due through the business activity statement (including PAYG instalments), income tax assessments, fringe benefits tax assessments and excise;
- allowing businesses on a quarterly reporting cycle to opt into monthly GST reporting in order to get quicker access to GST refunds they may be entitled to;
- allowing businesses to vary PAYG instalment amounts to zero for the March 2020 quarter and businesses that vary their PAYG instalment to zero can also claim a refund for any instalments made for the September 2019 and December 2019 quarters;
- remitting any interest and penalties, incurred on or after 23 January 2020, that have been applied to tax liabilities; and
- working with affected businesses to help them pay their existing and ongoing tax liabilities by allowing them to enter into low interest payment plans.
Under the insolvency law reforms announced today, liability for debts incurred is not removed from the legislation and the enforcement of debts by way of court process or through security interests is still an option to creditors.
You will need to continue to monitor developments about other compliance obligations under the Corporations Act, with changes to be expected in the coming days and weeks.
Full details of these proposed amendments are yet to be released.
If you would like to draw from other global resources developed by Baker McKenzie on COVID-19, please visit our Coronavirus Resource Centre.