In a bid to limit the negative economic effects of the coronavirus on Australia’s SME business space, the Federal Government have taken measures to put in place emergency legislation. Notably on 25 March 2020, Schedule 12 of the Coronavirus Economic Response Package Act 2020 (“Coronavirus Act”) was passed to amend the existing insolvency laws within the Corporations Act 2001 (“the Act”). The Coronavirus Act is effective for 6 months and makes the following changes:
- Increases the minimum threshold requirements for issuing statutory demands and extends the time companies have to respond to statutory demands;
- Provides a moratorium on insolvent trading; and
- Empowers the Treasurer to provide targeted relief from, or modification of, certain obligations under the Act by way of temporary instrument-making powers.
Under the usual circumstances, a director of a company can be held liable for the debts of the company where it can be shown the director traded the company while it was insolvent. Under the Coronavirus Act regime, the power for a liquidator to pierce the corporate veil and make a claim against a delinquent director for insolvent trading has been suspended for a period of 6 months. This is only for debts that the company incurs in the normal course of business; debts raised by the company that are not necessary for its continued operation may not gain the same protection from the moratorium. However, it should be noted that all other director duties remain intact and should be complied with. The ultimate effect of the moratorium is that directors will be able to incur debts that relate to the ordinary course of business, where those debts are necessary to facilitate the continuation of the business for the 6-month Coronavirus Act regime.
To view ASIC FAQs in Covid-19 implications for financial reporting and audit, click here