company law
Legal30/03/2020 12:00:00 AM

Company Law and Bankruptcy & Insolvency – A summary of the temporary legislative changes due to COVID-19

On 24 March 2020, in response to the evolving COVID-19 medical emergency, the Government introduced and passed temporary legislation with unprecedented expediency. The purpose of this suite of temporary legislative measures is to provide companies with some form of financial relief whilst the crisis continues.

With a myriad of information evolving on a daily basis, it is easy for companies to become overwhelmed as to what legislative changes are important when it comes to operating their business.

The purpose of this article is to summarise the key temporary legislative measures which company directors need to be aware of to ensure that their business:

  1. Remains compliant with their statutory obligations,
  2. Is cognisant of the changes surrounding proceedings such as bankruptcy & insolvency, and
  3. Avails of any temporary relief measures available in order to cope with the crisis.

The key temporary legislative measures are summarised below.

Coronavirus Economic Response Package Omnibus Act 2020

Amendments to legislation

The Coronavirus Economic Response Package Omnibus Act 2020 (Cth) (COVID Act) amends the Corporations Act 2001 (Cth), by:

  • Inserting a new Part 9.11. This new part provides certain flexibility from the provisions of the Corporations Act by permitting the Minister to exempt certain persons from the strict provisions of the Corporations Act or to modify a provision, or provisions, to exempt certain persons or class of persons from their obligations under the Corporations Act. ASIC may apply to the Court for an order that the person, or persons, comply with any conditions associated with these exemptions. These temporary measures are in place for a period 6 months, unless the Minister notifies otherwise.
  • Extending the time by which a company may be required to pay a debt under a statutory demand, pursuant to s 459E of the Corporations Act.
  • Increasing the time by which a company may respond to a statutory demand or apply to set aside a statutory demand, from 21 days to 6 months, pursuant to s 459G of the Corporations Act.
  • Inserting a new s 588GAAA to provide a safe harbour for company directors from their duty to prevent insolvent trading. Under this new section, company directors are relieved of personal liability for insolvent trading if debts are incurred in the ordinary course of business and prior to the appointment of an administrator or liquidator of the company. This relief applies during the six-month period commencing on the day which the section commences, or any longer period prescribed by the regulations.

The provisions concerning the Minister’s powers to exempt certain persons from their obligations or to modify their obligations under the Corporations Act are contained in Schedule 8 of the COVID Act. The remaining provisions, to extend the time to comply with a debt, respond to a statutory demand for payment of a debt or provide a safe harbour for corporate insolvent trading, are contained in Part 2 of Schedule 12 of the COVID Act.

The COVID Act also amends the Bankruptcy Act 1966 (Cth), by:

  • Extending the time required for a debtor to comply with a bankruptcy notice under Part IV of the Bankruptcy Act, from 21 days to 6 months, and
  • Amending the statutory minimum for which a creditor may institute involuntary bankruptcy proceedings from $5,000 to $20,000, for a bankruptcy notice pursuant to ss 41, 44 and 244 of the Bankruptcy Act.

The amendments to s 244 provide some relief in the administration of estates upon petition by a creditor.

These provisions are contained in Part 1 of Schedule 12 of the COVID Act.

Amendments to regulations

Corresponding amendments have also been made to both the:

  • Corporations Regulations 2001 (Cth) in Part 2 of Schedule 12 of the COVID Act, and
  • Bankruptcy Regulations 1996 (Cth), in Part 1 of Schedule 12 of the COVID Act.

These amendments insert new regulations to temporarily amend the definitions of statutory minimum and statutory period for the purposes of bankruptcy notices and bankruptcy proceedings.

What this means for corporations

With regards to insolvent trading it is not clear which debts will be regarded as being incurred “in the ordinary course of business”, particularly in the unusual circumstances surrounding COVID-19. The evidential burden will fall upon company directors to show that the debt was so incurred, s 588GAAA(2).

Paragraph 12.18 of the Explanatory Memorandum for the COVID Act states that a company director “is taken to incur a debt in the ordinary course of business if it is necessary to facilitate the continuation of the business during the six month period … of the [temporary legislation]”. This may include, for example, a company director taking out a loan in order to move some business operations online. It may also include debts incurred by continuing to pay employees during the COVID-19 pandemic.

The amendments appear to apply not only to debts incurred as part of the ordinary day-to-day trading operations of a business but possibly also to debts incurred in order to restructure a business to enable trading through the current COVID-19 crisis. Examples may include taking out a new working capital loan or the costs incurred in transitioning to the online delivery of goods and services, etc.

Australian Business Growth Fund (Coronavirus Economic Response Package) Act 2020

The Australian Business Growth Fund (Coronavirus Economic Response Package) Act 2020 (Cth) (Growth Fund Act) permits the Commonwealth to invest in a Corporations Act company for the purposes of providing small and medium Australian enterprises with access to capital.

Pursuant to s 5 of the Growth Fund Act, a Corporations Act company is defined as “a body corporate that is incorporated, or taken to be incorporated, under the Corporations Act 2001.”

What this means for corporations

The Commonwealth investing in a Corporations Act company may involve the Minister acquiring shares or debentures in a company, or becoming a member of the company, pursuant to s 10 of the Growth Fund Act.

Further reading and sources

Coronavirus Economic Response Package Omnibus Act 2020

Australian Business Growth Fund (Coronavirus Economic Response Package) Act 2020

Please subscribe to our dedicated COVID-19 blog for all the latest updates on the COVID-19 pandemic. We are here to assist you and your company in navigating the ongoing legislative and regulatory changes in response to COVID-19.

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