COVID - 19
Bankruptcy, Insolvency & Security of Payments in a Pandemic
In an attempt to constrain the economic fallout from COVID-19, the Commonwealth Government passed the Coronavirus Economic Response Package Omnibus Bill 2020 (“the Bill”).
Schedule 12 of the Bill makes temporary amendments to the Bankruptcy Act 1966 (Cth) and the Corporations Act 2001 (Cth).
These amendments commenced on 25 March 2020 (“Commencement”).
Statutory Demand
The Bill has temporarily increased the threshold for the issue of a statutory demand from $2,000 to $20,000. Additionally, the period for ‘presumed insolvency’ has increased from 21 days to six (6) months.
Those increases are expected to continue for six (6) months from Commencement and were introduced, in the Treasurer’s words:
“…to keep Australians in jobs and businesses in business, and build a bridge to the recovery. These measures are consistent with our principles. They are targeted, they are temporary, they are scalable and they are based on our existing tax and transfer system. The measures contained in this package of bills are designed to bolster domestic confidence and household consumption, reduce cashflow pressures for businesses and support investment to lift productivity and to keep people in jobs.” [1]
The Bill will (currently) curtail the effectiveness of a proposed-statutory demand, the alternatives to which may include:
(a) to ‘wait out’ the initial six (6) month period from Commencement – in the expectation it won’t be extended;
(b) using statutory recovery schemes – including under the Building & Construction Industry Security of Payment Act 1999 (NSW) (“the SOP Act”); and/or
(c) undertaking alternative dispute resolution.
Director Relief – ‘Safe Harbour’ Provisions
The Bill also introduced temporary relief from personal liability for directors of companies trading while insolvent and in respect of debt(s):
(a) incurred during the ordinary course of business; and
(b) necessarily incurred for the continuation of the business during the six (6) month period from the commencement of the relief.
Directors must satisfy these provisions before the appointment of an administrator or liquidator.
The evidentiary burden is on the person relying on the temporary safe harbour provisions. [2]
Personal Bankruptcy Relief
Minimum debt threshold
The Bill increased the minimum debt threshold for bankruptcy notices from $5,000 to $20,000 for six (6) months from Commencement. [3]
Debtor response period
In line with the interim changes to statutory demands, the debtor response period has increased from 21 days to six months.
Security of Payment Act
Significantly, the Bill did not make any amendments to the SoP Act.
Accordingly, its strict-time limits (and consequences of default), remain wholly preserved.
Key Takeaways from the Amendments
1. The period debtors have to respond to statutory demands and bankruptcy notices will now be six (6) months, rather than the ‘standard’ 21 days;
2. The minimum debt threshold has increased to $20,000 for both statutory demands and bankruptcy notices;
3. Directors are benefited by temporary relief from insolvent trading liabilities; and
4. The provisions of the SOP Act remain unchanged.
[1] Second Reading Speech, Monday, 23 March 2020 Hansard Page 2777
[2] Section 588GAAA Corporations Act 2001 (Cth)
[3] Sections 5(1), 41(1), 44(1) and 244(1) Bankruptcy Act 1966 (Cth)