One of the most startling parts of the response by the Federal Government has been the proposed moratorium on insolvent trading laws.

The proposed changes to this aspect of law are expected to be introduced via the Coronavirus Economic Response Package Omnibus Bill 2020 (‘the Bill’). We are yet to establish when (or if) this Bill will be passed however we imagine that it will come before Parliament with some urgency.

Incredibly, so as to assist businesses manage the immediate shock of the COVID-19 situation, the Federal Government is expected to take a number of steps with respect to corporate governance.

Insolvent Trading

The Government is preparing for an “avalanche” of insolvencies and bankruptcies resulting from the significant impact of COVID-19.

Accordingly, it is anticipated that there will be a “moratorium” on insolvent trading laws, being that there will be some degree of relief for directors who are concerned with personal liability associated with trading insolvent during this crisis. Directors are relieved of their duty to prevent insolvent trading so any debts incurred in the ordinary course of the corporation’s business and are expected to be relieved of this for the next six months.

Whilst there have been a number of “safe harbor provisions” in place, one of the key exceptions has been employee entitlements. Over recent years, Governments have not been so forgiving when it comes to directors who fail to pay employee entitlements in accordance with the Fair Work Act 2009 (Cth) and other important pieces of legislation. This is expected to change. A relaxation of personal liability of directors may mean that directors are more inclined to avoid paying employee entitlements over the next six months. This is, rightly, something that should be of concern during this period.

Statutory Demands

The Federal Government has also announced that they intend to increase the threshold at which a creditor can issue a statutory demand. Currently, creditors can issue statutory demands for amounts as low as $2000. The Bill intends to raise this amount to $20,000, meaning that a company’s survivability is not placed at risk by demands of smaller amounts during this period of time. Further, for unincorporated businesses, the threshold for the minimum amount of debt required for a creditor to initiate bankruptcy proceedings will increase from its current level of $5000 to $20,000. Both measures will last for six months. The time companies have to respond to such demands they receive will also be increased from 21 days to six months.

The important consideration for businesses will be whether these measures will allow them to “trade through” this difficult time, or simply allow them to drag an unviable business through this period without ramifications. In this regard, smaller businesses must remain cautious when becoming creditors to businesses which simply are not viable, whether it be now or in the future, as a result of this sudden down turn in business.

If you require assistance in understanding these proposed changes to corporations legislation, or require advice on any other corporate, commercial or workplace relations issues, please do not hesitate to contact Kathryn Adams on 0452 614 454.