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Hugo Prescott

- 15 May 2020
  • Commercial Law

IN CASE YOU MISSED IT – Important Changes to Australian Solvency Laws

Dated: 15 May 2020

Amidst the chaos of the last few months (and there certainly has been a lot of it), it is possible you missed the Federal Government’s recent changes to Australia’s solvency laws.

The purpose of these reforms is to ensure that Australia does not experience a tidal wave of insolvency (both corporate and personal) as we face the most significant economic crisis since the Great Depression – but enough of the doomsaying because, let’s face it, we get enough of that already!

One of the key changes – which, pre GCR, would likely have been politically disastrous – has been to give power to the Treasurer (Josh Frydenberg) to enact amendments to the Corporations Act 2001 (Cth) (Corporations Act) without the need for a Parliamentary vote.

This itself is quite extraordinary, but in circumstances where Parliament has only just recently begun to sit again, it has received little public controversy.

The changes came into effect on 25 March 2020 and are set to remain in place for 6 months, ending on 25 September 2020.

Statutory Demands

Arguably, the most important amendments to the Corporations Act relate to the operation of statutory demands.

A statutory demand is a demand made by a creditor against a company for a debt which is due and payable, to which there exists no genuine dispute and which is for an amount of $2,000 (or more).

Before the GCR, companies had 21 days only to respond to a statutory demand;  if they failed to do so, they would be deemed insolvent and the creditor would be entitled to act upon that presumption and issue wind-up proceedings against the debtor company (in other words, the creditor would have the right to try and bankrupt that company).

Statutory demands are a powerful (though often misused) instrument – with this in mind, the Government made the following key changes:

  • Increasing the minimum threshold from $2,000 to $20,000
  • Increasing the time to comply from 21 days to 6 months.

These changes will inevitably make it more difficult for businesses to recover outstanding debts owed to them – and, conversely, it will make it more difficult for businesses to be pressured into making payments they know they have no basis to dispute. 

Additional Safe Harbour Provisions for Company Directors

Directors of Australian companies may be found to be personally liable for debts incurred by their (insolvent) company where they had reasonable grounds to suspect the company was, or might be, insolvent at the time those debts were incurred.

Since 2018, directors have been protected by what are known as the ‘Safe Harbour Provisions’; these provisions are complex, but ultimately are designed to protect directors who have taken steps (or, in the other words, incurred debts) on the basis that doing so would reasonably likely to lead to a better outcome for the company and the company’s creditors.

By virtue of the amendments to the Corporations Act, from 25 March until 25 September 2020, directors will not be personally liable for debts incurred provided that debt was incurred in the ordinary course of business.

That is, the threshold for directors to rely on the safe harbour provisions has been lowered, thereby offering directors significantly greater protection than pre GCR.

Although there remains some ambiguity in relation to what kind of debts will be covered by these amendments, it is relevant to note that the purpose of the legislation is to provide directors with a greater degree of certainty that they will not face personal liability for actions taken to better the business’ prospects of surviving the GCR.

However, directors should not treat this as a license to incur debts free from consequence;   for example, were the director of a company (which they knew, or ought to have known, was likely already insolvent) to purchase a brand new Porsche in the company’s name, it is highly unlikely they would be able to rely upon the safe harbour provisions (not now, not ever) to protect them against being held personally liable for that debt.

How long will these temporary changes last?

It is important to emphasize these changes are temporary and temporary only, with the changes set to expire in a little over 4 months from now.

It is nearly impossible to envisage any set of circumstances where these changes would become permanent; this is perhaps one of the few certainties we can enjoy in these times.

However, there is a prospect these temporary changes will be extended beyond the initial 6-month time period.

To this end, it is worth noting the Government’s approach to this crisis appears to be fluid – as evidenced by the suggestions that the JobKeeper program will be reviewed and may end early.

Accordingly, we will all need to keep a close eye on the situation so that we can, to the best our of ability, plan accordingly.

Conclusion

These unprecedented amendments to the Corporations Act provide Australians with an added degree of protection as we navigate our way through this crisis; however, the changes are not permanent, and they will come to an end.

Unfortunately, it is impossible to know what lies ahead – but rest assured, we at DBH Commercial are ready to assist you and your business as Australia moves forward and tackles the challenges ahead.

Further information

For further advice and assistance in relation to the impact of COVID-19 and Australian insolvency law, please contact Dylan Steel on 08 8216 3340 or Hugo Prescott on 08 8216 3304.

Disclaimer:  This article provides a summary of the subject matter only.  The information contained within is not intended as advice, legal or otherwise, and should not be relied upon as such.  Please contact us should you wish to discuss the subject of matter of this article or to obtain professional advice on the same.