Registered charities which are incorporated as companies limited by guarantee will also be affected by the Federal Government’s initiative to provide temporary relief to financially distressed organisations.
As part of its response to the current COVID-19 crisis, the Federal Government has recently passed a raft of changes to Australia’s insolvency and bankruptcy laws. These are set out in the Coronavirus Economic Response Package Omnibus Bill 2020 (the Bill).
The changes aim to provide temporary relief to organisations and individuals facing financial distress because of the economic consequences of COVID-19 and take effect from 25 March 2020.
Debt recovery – statutory demands
A statutory demand (or stat demand) is a tool commonly used by creditors as a first step in winding up a company which owes the creditor money. Stat demands can ordinarily be used for debts totalling $2,000 or more.
Companies served with a stat demand have 21 days to respond, either by paying the debt, reaching a compromise (i.e. settling) with the creditor, or applying to the court to have the stat demand set aside.
Failing to do this within time raises a presumption that the company is insolvent. It is this presumption that often forms the basis for a later application to wind up the debtor company.
The changes introduced by the Bill do two things:
- increase the threshold for issuing a stat demand to $20,000
- increase the time for responding to a demand to 6 months.
These changes do not affect any contractual rights or obligations, and creditors are still free to enforce the debt through the courts.
Company directors can expose themselves to personal liability if their company trades whilst insolvent, and the acute, wide-ranging economic effects COVID-19 have already brought this issue into sharp focus for many organisations and directors.
To assist companies and directors manage through this difficult time, the Bill has introduced additional “safe harbour” protections for debts incurred by the company:
- in the ordinary course of the company’s business;
- during the 6-month period starting on the day the section commences (or any longer period prescribed by regulation); and
- before any appointment during that period of an administrator, or liquidator, of the company.
Although not contained in the Bill itself, the Explanatory Memorandum provides some context and examples as to the types of debts these measures are aimed at capturing – i.e. debts “necessary to facilitate the continuation of the business”.
The two examples given are taking out a loan to move business operations online, and debts incurred through continuing to pay employees during the COVID-19 pandemic.
It is important to note that these provisions do not excuse a company from paying its debts – they merely provide directors with additional comfort to trade through the current crisis.
What does this mean for me?
For those organisations looking to recover debts, your ability to enforce a court judgment or to commence wind-up/bankruptcy proceedings will be limited (at least for the next six months). There are, however, other ways of enforcing debts and securing your financial position.
Conversely, for those companies with outstanding debts, the increased threshold and time periods for compliance with stat demands may provide some temporary breathing room.
Company directors may take comfort in the additional safe harbour provisions available in relation to insolvent trading.
However, those provisions do not provide directors with carte blanche. It is critical that directors take care to ensure that any debt is incurred “in the ordinary course of business” and doing so is in the best interests of the company.
The provisions will not protect a director against criminal penalties associated with insolvent trading where dishonesty or fraud is involved. For further details, the Treasury has published a fact sheet on the above changes.
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