There is no doubt that we are in unprecedented times. The COVID-19 pandemic has presented enormous challenges for businesses, including those that were otherwise profitable and viable businesses.
On 24 March 2020, and in response to the pandemic, the Federal Government enacted the Coronavirus Economic Response Package Omnibus Act 2020 (the Coronavirus Response Act) (‘Coronavirus Act’), which was primarily introduced to assist businesses and individuals to deal with cash flow issues caused by and anticipated to be experienced due to the pandemic.
Albeit that no firm date has been announced as to when the stimulus packages will conclude, eventually the financial assistance will end. At that point, we anticipate that a large number of businesses will likely find themselves in an even more distressed position.
Amendments made to the Corporations Act 2001 (Cth)
We have previously touched on the temporary amendments made to the insolvent trading provisions of the Corporations Act 2001 (Cth) (‘Corporations Act’) resulting from the enactment of the Coronavirus Act.
In summary, the amendments made to the Corporations Act mean that until 25 September 2020:
- A Statutory Demand threshold is increased from $2,000 to $20,000 and compliance with a Statutory Demand is extended from 21 days to 6 months. This means that until 25 September 2020:
- a creditor will be unable to issue a statutory demand to seek to recover an outstanding debt of less than $20,000; and
- if the debt is more than $20,000, a debtor will have 6 months (if issued and served prior to 25 September 2020) from the date of service to pay.
Inevitably, this will put further pressure on the creditor’s own cashflow, particularly for the building and construction industry.
- Directors will not be personally liable under the civil liability insolvent trading provisions of the Corporations Act if the debt was incurred in the ordinary course of business within the six-month period commencing 25 March 2020, which means that directors will have until 25 September 2020 to trade a company which may be insolvent without the concern that a creditor may seek to put the company in liquidation, or that there may be prosecution of a civil claim for insolvent trading. Please note this excludes criminal liability.
Risk for directors and companies to voidable transactions
Whilst the temporary relief measures aim to increase thresholds for commencing winding up proceedings and provide directors and businesses with temporary relief from insolvent trading, it is important that directors bear in mind that under the Corporations Act, they are not immune to the provisions relating to voidable transactions.
Directors and other stakeholders can still be liable for claims made under the Corporations Act in relation to the following:
- unreasonable director-related transactions under section 588FDA of the Corporations Act;
- unfair preferences under section 588FA of the Corporations Act; and
- uncommercial transactions under section 588FB of the Corporations Act.
What this means is that directors and other stakeholders need to ensure that they are not tempted to, nor engaging in any voidable transactions (for example, disposing of undervalued assets) during the six-month relief period (or at any time), otherwise businesses and individuals will be at risk of a claim being made by liquidators and orders being sought to claw-back any voidable transaction.
Knowledge and planning is the key to the future
It is important for directors and businesses to ensure that they are obtaining appropriate legal advice and planning for the future. This includes taking advantage of the temporary relief measures available without exposure to additional risks.
If you are concerned that you may have engaged in a voidable transaction or may be exposed to claim under the Corporations Act, please contact our office to discuss your options. At Rose Litigation Lawyers we have extensive experience acting for both liquidators and creditors in relation to voidable transactions and can assist you by providing you with viable options whilst always working towards a commercial resolution.