The real economy
Many observers and commentators consider that Covid-19 damaged the real economy with such force that almost all components of aggregate demand have been decimated beyond expectations and forecasts. For a while, and especially during the lockdown, it looked as though just about all sectors of the economy were in free fall and it is only now that Australia is slowly beginning to emerge from its induced coma that the damages can be assessed. Whilst it is unclear what shape the recovery will take, one thing is clear and that is that there is a distinct possibility that we are seeing the early beginnings of an insolvency pandemic that will gather momentum once the temporary relief measures expire.
The temporary relief measures
The Coronavirus Economic Response Package (Payments and Benefits) Act 2020 (Cth) is a temporary relief measure designed to provide financial support to entities affected by Covid-19. It contains in the order of 15 schedules that aspire to help various sectors of the economy survive the impact of Covid 19 where these measures range from the provision of instant asset write-offs to the early release of superannuation to name some. For present purposes, Schedule 12 is significant and it sets out the temporary relief measures for financially distressed businesses which are discussed below. These measures commence on 25 March 2020 and are in place for a period of six months (although they may perhaps be extended).
Statutory Demands
Typically, many companies end up being wound up for non-compliance with a statutory demand sent by a creditor. In that regard a presumption as to insolvency can arise where there has been a failure to comply with a statutory demand and that presumption usually applies for a 3 month period. The assumption does not arise where the statutory demand was set aside or withdrawn.
Before the temporary measures in the above act were implemented one of the key requirements for the issuing of a statutory demand was the existence of a debt, that was due and payable, and in an amount that was not less than $2,000. Under and for the duration of the temporary measures, the debt must not be less than $20,000 otherwise the statutory demand cannot be issued. Moreover, the time for compliance with a statutory demand has also temporary been increased from 21 days to 6 months.
Insolvent Trading
Another temporary measure is that for the 6-month period after 25 March 2020, the usual rules in s 588G(2) about the obligations on directors to prevent insolvent trading, do not apply if the debt was incurred in the ordinary course of business (and before an administrator / liquidator was appointed). A director wishing to mount such a defence has the onus of proving it.
Once the temporary measure expire
Many legal and other prognosticators consider that once the various measures included in the Coronavirus Economic Response Package (Payments and Benefits) Act 2020 (Cth) expire, including measures such as JobKeeper and those discussed above, then a large number of companies may end up being wound up. Liquidators will no doubt consider the availability of proceedings against directors for insolvent trading, and the possibility of bringing preference claims. Directors who do not have available to them D&O cover in the face of such proceedings may need to dip into their own pockets to defend such claims.
Ongoing Duties
Whilst the above temporary measures will no doubt provide some comfort to business entities and their directors there is still a need for ongoing awareness and compliance with other key duties.
Some of the other duties that should be adhered to include obligations on directors to:
- exercise due care and diligence;
- comply with their fiduciary duties, that is, to avoid a conflict between duty and personal interest and not to make any secret profits; and
- avoid engaging in any conduct that is or is likely to be misleading or deceptive under the ACL and or Corporations Legislation.
Ipso facto clauses
It is also worth remembering that whist certain contractual clauses (at least on paper) permit a company to modify or terminate contracts because of an insolvency event; such clauses cannot necessary be relied upon due to amendments made to the Corporations Legislation unless an application is made to the court for permission to exercise such contractual rights. Where such applications are made the court will have a discretion.
Commonly used defences
No discussion about the temporary measures would be complete without at least noting in passing some of the existing and key defences commonly relied upon. They are the defences contained in s 1317s (contraventions of civil penalty provisions) and s 1318 (proceedings for negligence, default, breach of trust etc.) of the Corporations Legislation.
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