Amendments to the Corporations Act 2001 (Cth) (Corporations Act) to implement the measures announced by Treasurer Josh Frydenberg on Sunday, 22 March 2020 to provide temporary relief for financially distressed businesses due to COVID-19 have now come into effect.
The Coronavirus Economic Response Package Omnibus Act 2020 (Cth) (CERPO Act) amendments were passed by the Parliament on 23 March 2020. They will apply for a 6 month period, but may be extended or have impacts beyond that timeframe.
As noted in our alert of 22 March 2020 the CERPO Act provides business with additional protections at a time when they will be considering how to maximise their prospects of weathering the impacts of COVD-19.
New Temporary Safe Harbour from Insolvent Trading
The duty to prevent insolvent trading, and the associated personal liability for directors, will now not apply to debts incurred in the ordinary course of the company's business. This new temporary safe harbour will apply to debts incurred on or after 25 March 2020 for 6 months (and so, up to 24 September 2020). This period could be further extended by regulation.
Unlike the existing safe harbour protection, this exemption from the insolvent trading prohibition is not conditioned on compliance with tax lodgement obligations or payment of employee entitlements being up to date. It will require relevant books and records to be produced on request to an insolvency appointee to be relied upon by the directors.
Regulations may also be made which prescribe circumstances when a director is unable to rely on this new safe harbour: no such regulations have yet been made.
The CERPO Act has also taken the opportunity to address a previous gap by extending the existing safe harbour protection to holding companies where they take steps to ensure the requirements of the existing safe harbour protection are followed by directors of the subsidiary when debts are incurred. That same extension will apply to the new temporary safe harbour introduced by the CERPO Act.
Critical to the operation of the new temporary safe harbour will be the scope of "ordinary course of the company's business". The legislation gives no direct guidance on this issue. The explanatory memorandum to the CERPO Act helpfully says:
A director is taken to incur a debt in the ordinary course of business if it is necessary to facilitate the continuation of the business during the six month period that begins on commencement of the subparagraph. 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. (our emphasis added)
This tends to suggest the "ordinary course" may involve new business initiatives outside existing operations. Given the obvious purpose of the legislation, to assist businesses in a time of extreme uncertainty, a relatively wide application should be expected.
Nevertheless, there will be limits on what transactions will meet this test. Directors should obtain advice in relation to the operation of the new temporary safe harbour, particularly in the event they are considering significant restructuring.
Directors should also be cognisant that:
- the temporary safe harbour measures do not change a director's duties owed to the company itself in a period of near or actual insolvency, when a director has a common law duty to take into account the impact on creditors of the company continuing to incur debts, and to avoid potentially worsening the financial circumstances of the company;
- other directors' duties which may be relevant when making decisions about the future of the company continue to apply; and
- notwithstanding the CERPO Act, other potential personal liability of directors (such as in relation to unpaid company taxes and superannuation guarantee charges) remain in place.
New Limits on Statutory Demands
Statutory demands issued from 25 March 2020 must now be for more than A$20,000 (an increase from the previous minimum of A$2,000), and they must allow a minimum of 6 months for the debt the subject of the statutory demand to be paid or compromised, or for an application to set it aside to be filed and served (up from the previous 21 days).
Consequential amendments to the prescribed forms have also been made.
Statutory demands issued under the law prior to 25 March 2020 (with the minimum of A$2,000 and 21 days) which have, or are yet to expire would still be effective. The temporary change in limits will last for 6 months (so, until 24 September 2020), although this may be further extended by regulation.
Treasurer Empowered to Modify the Operation of the Corporations Act
The Treasurer is now empowered to make instruments which exempt classes of persons from, or modify the operation of, specified provisions of the Corporations Act or regulations in relation to classes of persons.
In order to make such an instrument, the Treasurer must be satisfied that:
- it would not be reasonable to expect the persons in the class to comply with the provisions because of the impact of COVID-19; or
- the exemption or modification is necessary or appropriate to facilitate continuation of business because of COVID-19, or to mitigate its economic impact.
The instruments can be made up until 24 September 2020, and will have force for up to 6 months after they are made.
The power conferred on the Treasurer is very broad, and comes with very little explanation as to its limits or scope in either the CERPO Act or in the accompanying explanatory memorandum.