Changes to Bankruptcy and Winding Up Provisions due to Coronavirus impact – Coronavirus Economic Response to Package Omnibus Act 2020

06/04/2020

The Federal Government has made important changes to legislation to provide temporary relief for financially distressed individuals and businesses, by way of amendments to the Bankruptcy Act 1996, the Bankruptcy Regulations 1996, and the Corporations Act 2001 and the Corporations Regulations 2001. 

In the second reading speech on 23 March 2020 the Treasurer said:

“We are providing additional assistance to business to trade through the crisis. The government will also provide a safety net for businesses to allow them to get through a temporary period of insolvency and recover when economic growth picks up. To do this, we are amending the Corporations Act to temporarily increase the threshold for a creditor to initiate bankruptcy proceedings, to increase the time period for debtors to respond to a bankruptcy notice and to extend the period of protection a debtor receives after making a declaration or intention to present a debtor's petition. There will also be temporary relief for directors from any personal liability for trading while insolvent...” 

Three of the reforms are discussed below.  

a. Bankruptcy Reforms

The bankruptcy reforms broadly have the effect of increasing the time for compliance with a bankruptcy notice from 21 days to 6 months after the day of service, and increasing the minimum amount required for a bankruptcy notice and for presenting a creditor’s petition to $20,000 

We recently had to review the first of these changes in relation to a debt recovery action, where a Certificate of Assessment of legal costs was obtained on 25 July 2018, registered as a Judgment on 29 October 2019, and where a Bankruptcy Notice in relation to the Certificate of Judgment was issued on 22 January 2020.

The Bankruptcy Notice was served on the Debtor on 5 March 2020 (a relevant date).

In accordance with the usual form of Bankruptcy Notices at the time it was issued, the time for compliance in the Bankruptcy Notice was expressed to be 21 days from the date of service. Hence, the last day for compliance with it was 26 March 2020 (a further relevant date).

The above legislative reform came about through the passing into legislation of the Coronavirus Economic Response Package Omnibus Bill 2020, passed by both Houses of Parliament on 23 March 2020, and which received the Royal assent on 24 March 2020. The amendments apply on and from 25 March 2020.

That date is within the 21 days of service of the Bankruptcy Notice in question, and before it had failed to be complied with.

This necessitated a careful consideration of the savings and transitional provisions in the legislation, which showed that the reforms do not apply to the bankruptcy notice in question, as it was issued prior to them coming into effect. It is the date of issue of the Bankruptcy Notice which is the critical fact – not when it is served or the last day for compliance with it.

However where a creditor wishes to make application to bankrupt an individual who has failed to comply with a bankruptcy notice, by presentation of a creditor's petition after 25 March 2020, then other new reforms apply in relation to the matter, being the necessity for there being a debts or debts owing to the creditor of more than $20,000 (rather than $5,000). That is, even if the bankruptcy notice was correct in only requiring 21 days for compliance, if the debt owing at the time of presenting a creditor’s petition was less than $20,000, it would not be sufficient to give standing to present a petition.

The important points to take from this now are that:

• In relation to bankruptcy notices now issued, they need to specify a time for compliance of 6 months, rather than 21 days.
• The statutory minimum for issue of a bankruptcy notice is now $20,000, rather than $5,000 as it was prior to the reforms.
• There needs to be an amount owing to the creditor of at least $20,000 for it to have standing to present a creditor’s petition.
• These reforms are expressed to be repealed at the end of the period of 6 months starting on 25 March 2020.

b. Corporations Act Reforms

Statutory Demands

Similarly to the above reforms relating to individuals, the reforms relating to corporations are to the following effect: 

• For a Creditors Statutory Demand served on and from 25 March 2020, the period for compliance is now 6 months, rather than 21 days.
• Further, the minimum amount now required for such a statutory demand is $20,000, rather than the $2,000 it was before.

Temporary Relief for Directors from Duty to Prevent Insolvent Trading

Directors have had a statutory duty to prevent insolvent trading, most recently set out in s. 588G of the Corporations Act 2001. That duty generally applies where a person is a director of a company at the time when the company incurs a debt; and 

• the company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt; and
• at that time, there are reasonable grounds for suspecting that the company is insolvent, or would so become insolvent, as the case may be.

In some circumstances, where a director is taken to have engaged in a course of conduct which was reasonably likely to lead to a better outcome for the company, then that director can make out a defence to an insolvent trading action. This is what is known as the “safe haven” reforms.

The further safe harbour reforms in the Coronavirus Economic Response Package Omnibus Act 2020 now have the effect that section 588GAAA has been inserted into the Corporations Act

When the safe harbour does not apply

(3) Subsection (1) is taken never to have applied in relation to a person and a debt in the circumstances prescribed by the regulations for the purposes of this subsection. 

Definitions 

(4) In this section:

evidential burden, in relation to a matter, means the burden of adducing or pointing to evidence that suggests a reasonable possibility that the matter exists or does not exist. 

Basically, this means that, provided that a director can demonstrate that a debt is incurred by a company in the ordinary course of business in the 6 month period commencing on 25 March 2020 and before any appointment during that period of an administrator, or liquidator, of the company, then that director will have a defence to a claim that that particular debt was incurred in breach of the duty to prevent insolvent trading. 

Note that that this does not affect liability in relation to debts incurred by the company before 25 March 2020.

If you are seeking to recover a debt, or resist a recovery, or are a director of a company in these difficult economic times and require advice as to your liability, Watson & Watson Solicitors have the experience and knowledge to advise you in relation to the matter. Seek the appropriate advice and contact Richard Watson Accredited Specialist Commercial Litigation or his Personal Assistant Shereen Da Gloria to discuss your concerns.

This is only a preliminary view and is not to be taken as legal advice without first contacting Watson & Watson Solicitors on 9221 6011.