COVID-19: Restructuring and insolvency

What the temporary changes mean for restructuring and insolvency

On 22 March 2020, the Federal Government announced temporary relief measures to support businesses through COVID-19. Parliament has since rapidly passed the Coronavirus Economic Response Package Omnibus Bill 2020, reflecting the relief measures proposed. 

The relief measures, as they relate to insolvency law and practice, aim to:

  • provide directors with temporary relief from insolvent trading liability (although this new COVID-19 'safe harbour' is not a complete answer to those issues);
  • increase the thresholds for commencing winding up and bankruptcy proceedings; and
  • provide the Treasurer with broad powers to relieve companies of their obligations under the Corporations Act 2001 (Cth) to deal with unforeseen COVID-19 circumstances.

The changes to existing laws are temporary and, at this stage, will apply for six months (to September 2020). We answer your key questions below.

Your key questions answered on restructuring and insolvency

Contact: Tania CiniAlf PappalardoMatthew Whittle
Last updated: 25 March 2020

What are the new COVID-19 'safe harbour' measures?

As of the 23 March 2020, the Commonwealth Government has introduced a new insolvent trading 'safe harbour' comprising a six-month moratorium on insolvent trading liability in respect of debts incurred "in the ordinary course of the company's business" (the COVID Safe Harbour).

The COVID Safe Harbour will provide useful immediate relief for companies and their directors, particularly those who need time to assess the company's position before developing a turnaround plan or pursuing an insolvency administration if that becomes necessary.

However, most distressed businesses will still need to work quickly to prepare a detailed survival and turnaround plan that will encompass some or all of the well-established techniques used by insolvency professionals.  They will also need to monitor the implementation of the turnaround plan and ensure that it is updated and revisited as the COVID-19 crisis evolves.   In these circumstances, it would make sense for businesses to prepare a plan which meets many of the requirements of the existing 2017 Safe Harbour provisions.

For more information, read our latest insight.

Has there been an increase to the threshold at which creditors can issue a statutory demand and the time companies have to respond?

YES

The current minimum threshold for creditors to issue a statutory demand on a company will be increased from $2,000 to $20,000 for the next six months. Helpfully, a company will also have six months to respond to a statutory demand, a significant increase from the current 21 day timeframe. This development will ensure that companies have the breathing space they need to deal with their financial issues without the immediate threat and distraction of winding up proceedings being commenced by aggressive creditors.

Is there flexibility in obtaining relief from other Corporations Act provisions?

YES

The Treasurer will be given a temporary instrument-making power to amend provisions of the Corporations Act, to provide relief from, or modify, obligations under the Act. The power is intended to allow the Treasurer the flexibility to deal quickly with unforeseen circumstances arising from COVID-19, without the need for legislation with its attendant delay. The instrument-making power will apply for six months, and any instrument made under this power will apply for six months from the date it is made.

Has there been an increase in the threshold for bankruptcy notices and the time individuals have to respond?

YES

The minimum debt to initiate bankruptcy proceedings against an individual will temporarily be increased from $5,000 to $20,000. The time to respond to a bankruptcy notice will be increased from 21 days to six months.

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COVID-19

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