Suspension of insolvency laws in response to COVID-19

On Monday 23 March 2020, the federal parliament passed the Coronavirus Economic Response Package Omnibus Act 2020 (Cth) implementing a range of urgent measures announced by the government on Sunday 22 March 2020.

The Act includes changes to the Corporations Act 2001 (Cth) and Bankruptcy Act 1966 (Cth) which will apply for a period of 6 months (at this stage) commencing the day after royal assent is given.

Notable changes

The changes include:

1. Increasing the minimum amount of a debt for which a bankruptcy notice can be served from $5,000 to $20,000.
2. Increasing the minimum amount of a debt for which a statutory demand can be served from $2,000 to $20,000.
3. Increasing the period for compliance with bankruptcy notices and statutory demands from 21 days to 6 months.
4. Suspending a director’s liability for failing to prevent insolvent trading where a debt is incurred:
   1. in the ordinary course of the company’s business; and
   2. during the period of 6 months after the changes commence (or any longer period prescribed); and
   3. before the appointment of any external administrator.
5. There is also an exemption from a holding company’s liability for a subsidiary’s insolvent trading in circumstances where the above exception applies.

In addition to the above changes, the Treasurer has been given special power to:

1. exempt classes of persons from the operation of specified provisions of the Corporations Act; or
2. modify the operation of specified provisions of the Corporations Act or its regulations for a period of 6 months where the Treasurer is satisfied:
   1. 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
   2. the exemption or modification is otherwise necessary or appropriate in order to:
      1. facilitate continuation of business in circumstances relating to COVID-19; or
      2. mitigate the economic impact of COVID-19.

This allows the Treasurer to make changes to the operation of the Corporations Act while parliament is not sitting in the coming months.

Observations and concerns

The above changes are drastic and sweeping and many will consider them necessary to respond to the current crises.

But the changes do raise several issues about which we express some concern:

1. The suspension of insolvent trading laws shifts risk substantially onto suppliers who, in many cases, will eventually find out they continued to supply goods or services to companies who could not afford to pay for them.
2. Further to the above, COVID-19 does not affect all companies equally and indeed some companies may now be benefitting from its effect, yet they receive the same protection as those adversely affected.
3. Notwithstanding the change to the insolvent trading provisions, the penalty provision¹ relating to where the failure to prevent the company incurring the debt was dishonest remains in effect. How this may operate is uncertain: perhaps this will prevent company directors abusing the ‘holiday’ from insolvent trading laws to run up credit outside the ordinary of course of business.
4. Hopelessly insolvent companies and individuals – whether or not affected by COVID-19 – who are served with bankruptcy notices or statutory demands after the commencement of these provisions will effectively be able to ‘run wild’ in the economy, shielded from creditors’ petitions.
5. The Treasurer’s power to suspend or amend the operation of the Corporations Act – without consulting parliament – is truly unprecedented.

While we understand the rationale for these changes, we are concerned about allowing insolvent companies and individuals to keep trading with impunity, only for their creditors ultimately to bear the consequences.

Next steps

We will watch with interest to see how the practical consequences of these changes pan out.

If you require advice or assistance, please contact a member of our Insolvency & Reconstruction team.

^{1. in s 588G(3) of the Corporations Act 2001 (Cth)}