Recent Changes to
Insolvent Trading Laws

WHAT YOU NEED TO KNOW

14 APRIL 2020

KEY TAKEAWAYS

• New laws applying for a 6 month period from 25 March 2020 are designed to provide relief from personal liability for directors of companies that continue to trade while insolvent.
   
• These temporary measures signify an attempt by the Federal government to instil confidence in directors to continue to trade as much as is reasonably possible through the COVID-19 economic crisis if they believe there is a chance their company will remain solvent.
   
• Directors of a company facing financial difficulties may now have more options available to them beyond placing the business into administration.
   
• Directors must continue to comply with their duties generally notwithstanding the relaxation of laws applying to insolvent trading.
   
• Please contact us if you have any query or concern regarding your obligations as a company director under the new regime.

BACKGROUND

As you are aware, the outbreak of COVID-19 is placing significant pressure on the global economy. As a consequence, company directors have a responsibility to make difficult and urgent decisions about the future of their businesses. These decisions will need to be made against the backdrop of their fiduciary and other duties under the Corporations Act and the general law.

Recognising these challenges, the Federal government has recently announced temporary measures that may, in certain circumstances, protect directors. A brief summary of these changes is set out below:

1.         What are the measures?

As part of the government’s economic measures and stimulus package to address the impact of COVID-19, it recently announced a relaxation of laws applying to directors of companies that continue to trade while insolvent (Temporary Relief Measures). These Temporary Relief Measures have been introduced in an effort to maintain director confidence to continue to trade without the burden of having to place the company into administration, if there is a chance that the company may continue to be solvent.

2.         When can a director rely on the Temporary Relief Measures?

Directors may be able to rely on the Temporary Relief Measures if the company incurs relevant debts:

• in the ‘ordinary course of the company’s business’; and
• during a six month period starting from 25 March 2020 (it is possible that the government may seek to extend this period); and
• prior to the appointment of any administrator or liquidator of the company.

Whether or not a debt is incurred in the ‘ordinary course of a company’s business’ will depend on the circumstances. Generally speaking, a director will incur a debt ‘in the ordinary course of business’ if the debt is necessary to facilitate the continuation of the business. Examples may include continuing to pay employees or incurring expenses to move some business operations online.

Ultimately, it will be a matter for directors to assess carefully whether the debt incurred is necessary for the business to survive and the onus of proof will be with the director who wishes to rely on the relief in any proceedings.

3.         When do the Temporary Relief Measures not apply?

The Temporary Relief Measures are designed to provide limited and targeted protection to directors during this economic crisis. They are not designed to eliminate directors’ duties more broadly, or provide them with free rein in decision making.

Directors will be ineligible for relief if they act dishonestly or fraudulently. In addition, directors must continue to comply with all director’s duties and ensure that they diligently manage their companies.

The content of this article is current at the date of publication and is intended for reference purposes only. It does not constitute legal advice and should not be relied upon as such. You should always seek legal advice about your specific circumstances before dealing with any of the matters contemplated by this article.