COVID-19 Economic response—temporary relief for financially distressed businesses

On 18 December 2019 the Australian Securities and Investments Commission (ASIC) published its annual overview of corporate insolvencies for the 2018–2019 financial year and made the following observations:

  • small to medium size corporate insolvencies continue to dominate external administrators’ reports. 85 per cent had assets of $100,000 or less, 76 per cent had fewer than 20 employees and 38 per cent had liabilities of $250,000 or less and
  • 96 per cent of creditors in this group received between 0–11 cents in the dollar, reflecting the asset/liability profile of small to medium size corporate insolvencies.

On 23 March 2020 the Parliament enacted the Coronavirus Economic Response Package Omnibus Act 2020 (Omnibus Act). Part 2 of Schedule 12 of the Omnibus Act contains amendments to put into effect three temporary measures intended to avoid unnecessary insolvencies arising from business closures due to coronavirus.

Statutory demand

A statutory demand is a document issued by a creditor. The Corporations Act 2001 requires a debtor company to pay a debt it owes (section 459E). If the debtor company fails to pay the debt within 21 days after the demand is served, come to a suitable arrangement with the creditor (section 459F) or make an application to set the demand aside within that time period (section 459G), then the company is presumed to be insolvent (section 588E). Once there is a presumption of insolvency, then it is open to the creditor to commence proceedings to wind up the debtor company. 

Measure 1—response time for a statutory demand

Part 2 of Schedule 12 of the Omnibus Act amends sections 459E, 459F and 459G of the Corporations Act so that the time within which a debtor must respond to a statutory demand (called the statutory period) will be 21 days or a longer, prescribed period. In turn, the Corporations Regulations 2001 are amended to provide that the prescribed statutory period is six months. In addition, the Omnibus Act makes consequential amendments to Form 509H—Creditor’s statutory demand for payment of debt (located in Schedule 2 to the Corporations Regulations) to replace references to ‘21 days’ with references to ‘the statutory period’.

Measure 2—statutory minimum

A statutory demand can only be issued when a debt is over $2,000 and is due and payable. Part 2 of Schedule 12 of the Omnibus Act amends note 2 in Form 509H so that the reference to ‘the statutory minimum of $2,000’ is replaced with a reference to the statutory minimum being an amount of ‘$2,000 or a greater amount prescribed by the regulations’. Section 5.4.01AA of the Corporations Regulations inserts the definition of statutory minimum so that the prescribed amount is $20,000.

Duty to prevent insolvent trading

Section 95A of the Corporations Act 2001 provides that a company is classified as being solvent if, and only if, it is able to pay all of its debts as, and when, they become due and payable. Otherwise the company is insolvent.

Section 588G of the Corporations Act provides that a person breaches the duty to prevent insolvent trading if:

  • they are a director of a company at the time when the company incurs a debt
  • the company is insolvent at that time, or becomes insolvent by incurring that debt
  • when the company incurs the debt, there are reasonable ground for suspecting that the company is insolvent or would become insolvent by incurring that debt and
  • the person is aware that at the time of incurring the debt, there are reasonable grounds for suspecting the company is insolvent (or would become insolvent) or a reasonable person would be so aware.

Measure 3—creating a temporary safe harbour

Part 3 of Schedule 12 of the Omnibus Act inserts section 588GAAA into the Corporations Act to create a temporary safe harbour in response to the coronavirus. It operates so that a breach of the duty to prevent insolvent trading does not occur if the debt is incurred:

  • in the ordinary course of the company’s business
  • during the six month period starting on 25 March 2020 or a longer period that is prescribed by the Regulations and
  • before any appointment during that period of an administrator, or liquidator, of the company.

However, a person who wishes to rely on the temporary safe harbour bears an evidential burden in relation to establishing the matters set out in the dot points—that is, the person must adduce or point to evidence that suggests a reasonable possibility that the debt was incurred in the ordinary course of the company’s business, during the relevant period, and before the appointment of an administrator or liquidator.

There are three important features of this amendment.

First, the Regulations may set out the circumstances in which the temporary safe harbour is taken never to have applied to a person or to a specific debt.

Second, there is capacity to extend the time during which the protection of the safe harbour applies by Regulation should that be necessary.

Third, the obligation to prevent insolvent trading is in addition to the general duties of directors (sections 180 to 190C of the Corporations Act). Importantly, they must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they were a director of a corporation in the corporation’s circumstances and had the same responsibilities within the corporation as the director. These duties will remain.


Flagpost is a blog on current issues of interest to members of the Australian Parliament

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