Update – Relief from Bankruptcy and Insolvent Trading

In response to the COVID-19 crisis, the Australian Government (“the Government") introduced the Coronavirus Economic Support Package Omnibus Act 2020 (Cth) back on 24 March 2020 which provides, amongst other things, for the temporary relief to both individuals and businesses for the purpose of preventing bankruptcy and insolvency during this time.

This includes:

  • an increase of the threshold from $5,000 to $20,000 at which creditors can serve a bankruptcy notice on a person under the Bankruptcy Act 1966 (Cth) or $2,000 to $20,000 at which creditors can serve a statutory demand on a company under the Corporations Act 2001 (Cth) (“the Act”);
  • an increase of the statutory timeframe for an individual to respond to a bankruptcy notice or for a company to respond to a statutory demand from 21 days to six months;
  • relief for the directors of a company from any personal liability for incurring debts and trading when they should have suspected their company to be insolvent ("the Safe Harbour Defence"); and
  • allowance for flexibility in the Act to provide temporary and targeted relief for directors and companies under the provisions of the Act to deal with unforeseen events that arise as a result of the COVID-19 crisis.

These temporary measures were to be in place for an initial period of six months however, have since been extended to 31 December 2020.

The Government's intention behind these measures was to provide a safety net for businesses that have been affected by the COVID-19 pandemic. With respect to the temporary relief granted for directors from any personal liability for trading whilst insolvent, this measure continues to allow directors to make decisions about the future of their businesses, without exposing themselves to personal risk for insolvent trading during the March 2020 – December 2020 period.

The Safe Harbour Defence only applies to debts incurred by the directors of a company in the 'ordinary course of the company's business', that is, necessary to facilitate the continuation of the business during the COVID-19 crisis. However it does not allow a director to gain an advantage for themselves or someone else which is not connected with the company’s usual operations (which may include speculative business opportunities) or where misleading, deceptive, and/or fraudulent conduct is involved which will still attract investigation by ASIC for a possible breach of a directions obligations to the company under the Act or even criminal sanctions.

However, the Australian Restructuring Insolvency & Turnaround Association (ARITA) (the professional body for insolvency practitioners) has recently clarified the scope of this temporary measure and notes that this protection only applies if the entity is placed into external administration before the 31 December 2020 deadline. That is, if a business is placed into external administration after the 31 December 2020 deadline, there is no retrospective insolvent trading protection for directors.

It appears that many businesses have been operating under the assumption that even following the 31 December 2020 deadline, they will not be personally liable for insolvent trading for debts incurred during the period between 25 March 2020 and 31 December 2020. However, as ARITA has clarified this is simply not the case.

As such, directors could now face personal exposure for insolvent trading if they continue to trade the business whilst insolvent following the 31 December 2020 deadline but are later unable to survive and are wound up.

The key takeaway being that any director of a company in financial distress should ensure they seek adequate and professional legal advice prior to the 31 December 2020 deadline.

For more information on the insolvent trading provisions, please contact either Rosy Dean (nee Rosy Roberts) or Meghan Warren + 61 3 9822 8588 or email our team HERE.

I would like to receive Burke Lawyers Newsletters