In what is sure to be welcome news, the Australian government has announced temporary relief for company directors from Australia’s notoriously tough insolvent trading laws. This is a sensible decision, which is good news for directors (and their insurers) in what is proving to be unprecedented times.
Directors face personal liability if the company trades while insolvent. The speed with which the global economy is grinding to a halt is already making it incredibly difficult for directors to assess the solvency of their business. The likely credit crunch that is predicted to follow shortly will add to these complexities. Additionally, directors are having to balance their obligations under the Corporations Act 2001 (Act), with growing expectations from government and the public that everything possible needs to be done to avoid failure. The temporary relief announced by the government is intended to make sure that companies have the confidence to continue to trade through the COVID-19 health crisis with the aim of returning to viability when the crisis has passed.
Directors will be temporarily relieved of their duty to prevent insolvent trading with respect to any debts incurred in the ordinary course of the company’s business. It will not relieve them from liability for dishonesty and fraud, which will continue to be the subject of criminal penalties.
These measures are part of a broader package of temporary relief measures for distressed businesses, including:
• Temporary increase in the threshold at which creditors can issue a statutory demand on a company and the time the companies have to respond to these demands.
• Temporary increase in the threshold for a creditor to initiate bankruptcy proceedings (including increase in the time for debtors to respond to a bankruptcy notice).
• Providing temporary flexibility in the Act to provide targeted relief for companies from provisions of the Act to deal with unforeseen events that arise from COVID-19. (The Federal Treasurer will be given a temporary instrument-making power to temporarily amend the Act).
We will publish further updates on these developments as they evolve. Despite these welcome measures, we expect directors will continue to face many challenges as they navigate their organisations through this unprecedented crisis. We will explore some of these issues in future blogs.
In the meantime, if you are interested in legal issues connected to COVID-19, please access our global ‘living hub’, which pulls together some of our global thinking on issues and challenges that various clients across various sectors are facing. The site can be accessed here.