Running a Business and Insolvency Risk in the Time of Coronavirus

by | Mar 30, 2020 | Corporate & Business

The Coronavirus has imposed immense pressure on businesses in many sectors, which places stress on the directors and business operators.

On 22 March 2020, the Australian Government announced that it would temporarily relax insolvency laws and directors’ obligations, with a view to reducing some of the burdens on business operators and directors, and give businesses a chance to endure the financial distress the next few months.

Insolvency Reforms

The Government has introduced a number of reforms directed at various areas, including specifically relating to the insolvency provisions such as:

  • increasing the minimum debt in respect of which a statutory demand can be issued from $2,000 to $20,000 (and parallel increases in minimum bankruptcy notices from $5,000 to $20,000);
  • extending the time for repayment of a debt the subject of a statutory demand or bankruptcy notice from 21 days to 6 months;
  • relieving directors from personal liability for insolvent trading in relation to debts incurred in the ordinary course of business.

We think each of these items will assist to give businesses some room to move in these difficult times.

Statutory Demands

Increasing the threshold and extending the time permitted to deal with a statutory demand before a winding up order can be made should reduce the number of demands that can be lodged and permit businesses a reasonable period within which to deal with the debt.

Insolvent Trading

In normal circumstances, 588G of the Corporations Act 2001 (Cth), provides that a director of a company can be personally liable for debts incurred by the company if, at the time the debts were incurred, it was likely that the company was either insolvent or would become insolvent by incurring the debt.  (Note that incurring a debt is interpreted to mean a fresh debt, rather than a recurring payment under an existing obligation.)

The temporary “safe harbour” is intended to give directors some breathing space to make decisions and try to keep their businesses trading without fear of personal liability for a mis-step.

The conditions under which the exemption will be available to directors are where the debt is incurred:

  • in the ordinary course of business;
  • in the next six months after commencement of the new laws; and
  • before any appointment of an administrator or liquidator of the company.

Note that there will be limits on the application of the relief, and a director seeking refuge must prove that it should apply (which is contrary to the usual position).

It is important to remember that this reform is therefore not a licence to act carelessly. Directors remain bound by all of their other duties, including the requirement to act with care and diligence, in good faith in the best interests of the company and to not improperly use their position or information received for personal gain or to cause detriment to the company.

Conclusion

These reforms will affect creditors and will give those businesses who are suffering from the catastrophic financial situation a fighting chance.

If you would like further information on the reforms, or your rights and obligations under the Corporations Act (whether as a director, business operator or creditor), we would be happy to advise you.

Please call 03 9614 7111 or email us at commercial@nevettford.com.au for a discussion.