On 23 March 2020, the Australian Parliament passed the Coronavirus Economic Response Package Omnibus Act No. 22 of 2020 (the Act), which is designed to provide an economic response to the effect, on Australia, of the coronavirus pandemic sweeping the world by stimulating and supporting economic activity.

In relation to the Australian insolvency regime the Act made some significant changes to the relevant laws as follows.

Temporary relief for financially distressed individuals and businesses

To avoid unnecessary bankruptcies and insolvencies, the Act provides a safety net to help businesses to continue to operate during a temporary period of illiquidity, rather than enter voluntary administration or liquidation; and a safety net to individuals to assist them with managing debt and avoiding bankruptcy.

The amendments temporarily increase the minimum amount of debt required to be owed before a creditor can initiate involuntary bankruptcy proceedings against a debtor from $5,000 to $20,000. The amendments also temporarily provide debtors more time to respond to a bankruptcy notice – the period is extended from 21 days to six months; and temporarily extends the timeframe in which a debtor is protected from enforcement action by a creditor following presentation of a declaration of intention to present a debtor’s petition – the period is extended from 21 days to six months.

The amendments increase the statutory minimum for a creditor to issue a statutory demand to a debtor from $2,000 to $20,000. This raises the thresholds for creditor demands that can push businesses into insolvency. The amendments also temporarily provide debtors more time to respond to a statutory demand – the period is extended from 21 days to six months.

Temporary relief for directors from duty to prevent insolvent trading

The Act provides temporary relief for directors from their personal duty to prevent insolvent trading. The temporary relief is achieved by the suspension of the obligation on the directors under the Corporations Act to prevent insolvent trading, where a debt is incurred in the ordinary course of the company’s business during the period from 24 March to 23 September 2020.

This amounts to a six-month period in which a new (second) safe harbour from the directors’ duty to prevent insolvent trading applies.

A director may rely on the new temporary safe harbour in relation to a debt incurred by the company if:

  • the debt is incurred in the ordinary course of the company’s business;
  • the debt is incurred during the six month period starting on the day the new law commences, or a longer period as prescribed by the regulations; and
  • the debt is incurred before any appointment of an administrator or liquidator of the company during the temporary safe harbour application period.

A 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 that begins on commencement of the law. This could include, for example, a director taking out a loan to move some business operations online. It could also include debts incurred through continuing to pay employees during the Coronavirus pandemic. It probably will not apply to debt incurred, for example, as a means to refinance the company. The director would likely look to the 'old' safe harbour provisions for protection in that event.

The regulations may prescribe circumstances in which the temporary safe harbour is taken never to have applied in relation to a person and a debt.

A person wishing to rely on the new temporary safe harbour in a proceeding in which unlawful insolvent trading is alleged bears an evidential burden in relation to that matter. It is encumbent on directors to maintain proper records in relation to the decisions taken under this regime.

Similarly a holding company may rely on the temporary safe harbour for insolvent trading by its subsidiary if it takes reasonable steps to ensure the temporary safe harbour applies to each of the directors of the subsidiary, and to the debt, and if the temporary safe harbour does so apply. The holding company would bear the evidential burden in relation to these matters.

Directors should be aware that the temporary safe harbour measures do not provide relief from director's duties owed to the company itself and third parties under other provisions of the Corporations Act and under the Common Law. Accordingly, directors must continue to mitigate the risks of the company falling into insolvency by taking reasonable steps to inform themselves about the company’s current and ongoing financial viability as well as assessing the impact of incurring any further debts.

Although providing relief to directors for the consequences of insolvent trading, the company will continue to remain liable for debts incurred.

Whilst the measures may be a panacea for rescuing the many companies that may struggle to continue in current circumstances, we see the following issues which may arise in rushing to enact such measures, in particular, regarding directors' duties and potential liability.

An exemption from director liability for insolvent trading may well protect directors of companies with genuine short-term issues but long-term viable businesses, but it may also have the effect of artificially supporting companies that would otherwise have been a candidate for failure regardless of the economic circumstances. The removal of liability can be a shield for those who may be reckless as to their directors’ duties, adversely impacting the rights of their creditors and employees.

Australia already has in place laws that operate as a ‘carve-out’ from the director insolvent trading provisions, designed to permit directors to take measured risks to save an ailing company, and thereby better protect creditors and employees – the ‘safe harbour’ regime enacted in 2017. This regime has the advantage that it is only available to companies with diligent, financially well-informed directors that have demonstrated ongoing compliance with requirements to meet employee entitlements and tax reporting obligations. Accordingly, distressed companies can still avail themselves of the original safe harbour provisions to pursue a course of action reasonably likely to lead to a better outcome than administration or liquidation where that is practically achievable.

Creditors of companies trading in these circumstances should be aware of the increased trading risk as well as the voidable transaction risk (in particular the risk of payments received by creditors subsequently being set aside as preferences) if ultimately those companies become insolvent but continue to trade in reliance on these provision.

It is more important than ever for directors assessing their options in the current economic climate to seek professional advice so that decisions can be made that will best protect the company, its creditors and employees – whether that decision is that the criteria for the safe harbour provisions apply and a plan can be put in place that is reasonably likely (objectively) to effect a “better outcome” than immediate resort to a formal insolvency process, or, that the appointment of an insolvency practitioner as an administrator will best serve a company that may be viable in the medium to long term.

Other provisions affecting Australian corporate life touched on by the Act include the following:

Instant asset write offs

The Act includes provisions intended to complement the existing instant asset write off for small and medium sized business entities so supporting business investment over the period from the announcement date to 30 June 2020.

The tax law is amended to increase the cost threshold below which small business entities can access an immediate deduction for depreciating assets and certain related expenditure (instant asset write-off) from $30,000 to $150,000 from 12 March 2020 to 30 June 2020. The instant asset write-off is available to entities with an aggregated turnover between $10 million and $500 million (up from the existing cap of $50 million).

Backing business investment

The Act provides an incentive for businesses with aggregated turnover of less than $500 million in an income year to make capital investments by allowing them to deduct the cost of depreciating assets at an accelerated rate so stimulating and supporting economic activity, and enhancing their future productive capacity.

The accelerated rate of deduction will help provide these businesses by boosting cash flow from their capital investments.

Boosting cash flow for employers

The Cash Flow Boost Bill is a key part of the response to the impact of the Coronavirus. It provides for payments to support employers and encourage the retention of employees through any downturn.

The legislation provides that the Commissioner of Taxation must make cash flow boost payments to eligible entities in two tranches. The first cash flow boost payments are required to be made to an eligible entity for a period ending from March 2020 to June 2020 where the entity notifies the Commissioner of an amount it has withheld in certain prescribed circumstances. Eligible entities will receive a minimum cash flow boost payment of $10,000 in the first period for which they are eligible. Entities will receive further amounts, based on the amount withheld, up to a maximum total of $50,000.

The Commissioner must also make the second cash flow boost payments to an entity for a total amount equal to the amount of the first cash flow boost payments to which the entity is entitled. The second cash flow boost payments will generally be made on lodgement of the activity statement containing the GST return of the entity for the period.

Financial framework regulations – aviation sector

The Financial Framework Regulations have been amended including establishing legislative authority for Government spending on a measure to provide financial assistance to participants in the Australian aviation sector to assist with the impact on the sector of the Coronavirus. This is a temporary financial relief package for Australian airlines and other aviation sector participants.

Providing flexibility under the Corporations Act

The Act amends the Corporations Act to establish a temporary mechanism to provide short-term regulatory relief to classes of persons that, due to the Coronavirus, are unable to meet their obligations under the Corporations Act or the Corporations Regulations. The mechanism is temporary and will be operative for six months only. It also provides for short-term regulatory changes to facilitate continuation of business or mitigate the economic impact of the Coronavirus.

Guarantee of lending to small and medium enterprises

The SME Lending Guarantee Bill gives effect to the Government’s commitment to enter into risk sharing agreements with financial institutions to ensure that credit continues to flow to SMEs so that SMEs can continue to meet their immediate financing needs during the uncertain economic conditions caused by the Coronavirus.

The SME Lending Guarantee Bill provides that the Minister may, on behalf of the Commonwealth, grant a guarantee to a financial institution in connection with loans made, or to be made, by the financial institution if granting the guarantee is likely to assist in dealing with the economic impacts of the Coronavirus.

Australian Business Growth Fund

The Business Growth Fund authorises investment by the Commonwealth in the Australian Business Growth Fund and appropriates $100 million for that purpose.

A challenge for SMEs seeking to grow can be access to capital. Banks are reluctant to finance start-ups given the high risks involved. Entrepreneurs found it difficult to borrow more than around $100,000 on an unsecured basis to support their day-to-day trading activities. In addition, medium-sized businesses reported that it was hard to obtain additional finance once they have pledged all of their real estate as collateral. As a result, many entrepreneurs delay expanding their businesses until the expansion can be funded from retained profits.

The Government will help SMEs grow by co-investing with other financial institutions to establish an Australian Business Growth Fund that will provide equity finance to SMEs across a range of industries and locations. The Government has extended the intended use of the Australian Business Growth Fund to enable an increased availability of equity finance (as opposed to debt finance) for SMEs during the economic impact of the Coronavirus.

Assistance for severely affected regions

The Government has set aside $1 billion to support regions, communities and industry sectors most severely affected by the Coronavirus. The funds will be available to assist during the next few months and over the year ahead to ensure these communities are well placed to recover from the economic effects of the Coronavirus.

Structured Finance Support

The Structured Finance Support Fund, initially consisting of $15 billion, will enable the Government to ensure continued access to funding markets impacted by the economic effects of the Coronavirus, and to mitigate impacts on competition in consumer and business lending markets resulting from the Coronavirus. In particular, this will ensure smaller lenders can maintain access to funding, by the Government making targeted investments in structured finance markets.

The focus of the Fund’s activities will be investing in securitised loans, including residential mortgages, written by smaller lenders, through either warehouses or the term market. This will support the ability of smaller lenders to continue to issue new loans in the current economic conditions resulting from the impact of the Coronavirus; and obtain funding from markets at a competitive price.