In March 2020, the Federal Government introduced a suite of legislation to implement its economic response to the coronavirus pandemic. Of those pieces of legislation, the Coronavirus Economic Response Package Omnibus Act 2020 (Cth) (Omnibus Act), sought to provide temporary relief to financially distressed individuals and businesses by way of temporary amendments to bankruptcy and insolvency legislation and regulations.
The changes made by the Omnibus Act generally applied from 25 March 2020 and were initially set to expire on or before 25 September 2020. However, the Corporations and Bankruptcy Legislation Amendment (Extending Temporary Relief for Financially Distressed Businesses and Individuals) Regulations 2020 (Cth) extended the application of these changes until 31 December 2020.
These changes do not apply retrospectively.
Insolvency
Statutory Demands
Prior to the relief measures, a creditor could issue a statutory demand against a company demanding payment of a debt of at least $2,000 that was due and payable under section 459E of the Corporations Act 2001 (Cth). The company then had 21 days after being served with the statutory demand to either:
- pay the demanded amount;
- reach an agreement with the creditor about the debt; or
- commence proceedings in Court to set aside the statutory demand.
If a company fails to respond to a statutory demand within the prescribed period, the company is presumed to be insolvent and the creditor can commence proceedings in Court to wind up the company.
However, effective from 25 March 2020, the Omnibus Act amended the Corporations Act 2001 (Cth) and Corporations Regulations 2001 (Cth) to:
- temporarily increase the minimum threshold for a creditor to issue a statutory demand against a company/debtor from $2,000 to $20,000; and
- temporarily extend the time for the debtor/company to respond to a statutory demand from 21 days to 6 months.
These changes do not affect the ability of the creditor to commence proceedings in Court against a company to obtain an order or judgment for any debts owing to it.
Duty of Directors to Prevent Insolvent Trading
Prior to the relief measures, under section 588G of the Corporations Act 2001 (Cth), a director of a company has a duty to prevent insolvent trading by a company. A director may be personally liable for debts incurred by the company if it trades while insolvent. A company will be taken to be insolvent if it is unable to pay its debts when they fall due.
However, effective from 25 March 2020, the Omnibus Act amended the Corporations Act 2001 (Cth) and Corporations Regulations 2001 (Cth) to include temporary relief to directors from their personal duty to prevent insolvent trading if the debt in question is incurred by the company:
a) in the ordinary course of business; and
b) during the prescribed period starting on the day the section commences, being 25 March 2020 (or any other period prescribed by regulations); and
c) before any appointment during that period of an administrator or liquidator of the company.
However, it is important to note that this protection does not extend to relieve a director from his/her general statutory or common law duties.
Bankruptcy
Bankruptcy Notices
Prior to the relief measures, where a creditor had obtained a final judgement or order against an individual debtor for an amount of at least $5,000, he or she could request the Official Receiver to issue a bankruptcy notice under section 41 of the Bankruptcy Act 1966 (Cth). The debtor then had 21 days after being served with the bankruptcy notice to respond by either:
- paying the amount in the bankruptcy notice in full;
- reaching an agreement with the creditor about the debt; or
- applying to the Court to set aside the bankruptcy notice.
If the debtor fails to respond to the bankruptcy notice within the prescribed period, they are committing an act of bankruptcy and the creditor may commence bankruptcy proceedings in the Federal Court against the debtor.
However, effective from 25 March 2020, the Omnibus Act amended the Bankruptcy Act 1966 (Cth) and Bankruptcy Regulations 1966 (Cth) to:
- temporarily increase the minimum debt threshold from $5,000 to $20,000 before an Official Receiver can issue a bankruptcy notice against an individual; and
- temporarily extend the time for debtors to comply/respond to a bankruptcy notice from 21 days to 6 months.
These changes do not affect the ability of a creditor to commence proceedings in Court against a debtor to obtain judgment for any debts owing to it.
Debtor Stay Period
An individual can also voluntarily become bankrupt by presenting a debtor’s petition to the Official Receiver under section 55 of the Bankruptcy Act 1966 (Cth).
Before presenting a debtor’s petition, a debtor can present a declaration to the Official Receiver of their intention to present a debtor’s petition under section 54 of the Bankruptcy Act. Prior to the relief measures, if the Official Receiver accepted this declaration, the debtor was provided with a “stay period” of 21 days during which unsecured creditors could not commence enforcement proceedings or seek to enforce a remedy against them.
However, effective from 25 March 2020, the Omnibus Act amended the Bankruptcy Act 1966 (Cth) and Bankruptcy Regulations 1966 (Cth) to temporarily extend the “stay period” from 21 days to 6 months.
Our litigation team at Lionheart Lawyers is experienced in commencing and defending insolvency and bankruptcy proceedings. Contact us today for more information.