On 25 March 2020 the Federal Government as part of its Coronavirus Economic Response Package Omnibus Act 2020 inserted a new section 588GAAA into the Corporations Act titled ‘Safe harbour—temporary relief in response to the coronavirus’
This was in addition to laws that also increased the threshold for bankruptcy notices and statutory demands to $20,000, previously $5,000 and $2,000 respectively as well as the time for compliance being extended from 21 days to 6 months. Preventing a very common form of debt enforcement.
These temporary relief measures were initially due to expire on 25 September 2020 but on 7 September 2020 these laws were extended to 31 December 2020 by the introduction of the Corporations and Bankruptcy Legislation Amendment (Extending Temporary Relief for Financially Distressed Businesses and Individuals) Regulations 2020)
The effect of these laws appeared to allow directors to trade effectively allow a company whilst insolvent until 31 December 2020 without impunity by reliance on the new s588GAAA………OR IS IT?
As always the devil is in the detail.
Firstly, despite the temporary relief measures directors could still be exposed for breach of duty if they continued to trade a company whilst insolvent if it is not in the best interest of the company. Noting that this duty extends to creditors and other stakeholders when a company is insolvent.
Secondly and most notably, advice from the Australian Restructuring Insolvency & Turnaround Association (ARITA) states that the new section 588GAAA is ONLY available to directors if a company enters External Administration, prior to the lifting of the temporary measures, currently 31 December 2020.
Subject to any further extensions or law changes, if a company enters into External Administration after 31 December 2020 the temporary relief is not available and directors would be required to rely on other defences to insolvent trading (section 588H) to the extent that they are available to them.
I may have traded whilst insolvent, what can I do?
We must remember that Insolvent trading only comes into effect if a liquidator is ultimately appointed to a company it does not apply if a company successfully enters a Deed of Company Arrangement after a Voluntary Administration, however the value and recoverability of any insolvent trading claim would be a factor for creditors to consider in any Deed of Company Arrangement proposal.
There are a number of options available to directors of distressed companies who may have or may be trading whilst insolvent.
- Appoint an External Administrator on or before 31 December 2020
Such action could allow access to the temporary relief measures
- Access the Safe Harbour provisions https://dyeco.com.au/safeharbouractearly/
Insolvent trading relief could apply beyond 31 December 2020 but the temporary relief measures may be lost if an appointment of an external administrator occurs after that date. External administration is not a requirement of Safe Harbour.
- Cease to trade, or cease to incur debt.
Ensures that insolvent trading is limited to debts incurred.
- If an eligible Small Business – enter a Small Business Restructuring Process
Notably the recently announced Insolvency Reforms for Small Business (businesses with debts under $1 million) which are due to come into effect from 1 January 2021 allow a company to institute a notice of an intention to enter a Small Business Restructuring Process and by doing so they will extend the temporary insolvent relief until 31 March 2021 provided the Restructuring Process is commenced by that date.
Note: The proposed Small Business Restructuring Process has been announced however no legislation has been released and as such may be subject to change.
- Avoiding liquidation by utilising the above measures.
As always our advice, is to act early, seek advice and understand your options by contacting any one of our 5 registered liquidators or two bankruptcy trustees. It does not cost anything to understand your options, it could cost a whole lot more if advice is not sought.