Temporary Insolvent Trading Moratorium Update

Temporary Insolvent Trading Moratorium Update

Directors seeking to rely on the temporary relief from insolvent trading may only be able to do so if the company enters voluntary administration or liquidation prior to 31 December 2020
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Tuesday, 13 October 2020
By Christine Stead

Earlier this year, the Australian Government introduced the Coronavirus Economic Response Package Omnibus Act 2020 (Cth) which was designed to provide temporary relief to businesses and stimulate economic activity. As touched on in our earlier article, this bill included a temporary COVID-19 safe harbour defence for directors from insolvent trading liability where ordinarily a director of a company in liquidation can be held personally liable for debts incurred when they should have suspected their company was insolvent.

Whilst the legislation has ultimately achieved its intended purpose, the Australian Restructuring Insolvency & Turnaround Association (ARITA), the professional body for insolvency practitioners, last month raised awareness to its members about the limitation of the defence.

ARITA outlined the specific amendment to the Corporations Act 2001 that provides temporary relief for insolvent trading as noted below:

588GAAA  Safe harbour—temporary relief in response to the coronavirus

  • Subsection 588G(2) does not apply in relation to a person and a debt incurred by a company if the debt is incurred:
  • in the ordinary course of the company’s business; and
  • during;
  • the 6 month period starting on the day this section commences; or
  • any longer period that starts on the day this section commences and that is prescribed by the regulations for the purposes of this subparagraph; and
  • before any appointment during that period of an administrator, or liquidator, of the company. “

Essentially, the relief measures may only apply if the company enters voluntary administration or liquidation prior to the expiry of the temporary measures, which is currently 31 December 2020.  If an appointment is not made prior to this expiry a director may not be protected by the moratorium and is exposed to the insolvent trading provisions.

The new defence will be subject to the interpretation of the courts but could also yet be updated or clarified by the Government under the recently announced insolvency reforms to introduce a simplified restructuring process. The Government have acknowledged there will be transitional issues between the moratorium ending and the new reforms commencing and have indicated a business will be able to declare its intention to access the simplified restructuring process. Following the declaration an extension to the temporary insolvency relief would then apply for a maximum period of 3 months.

What does this mean if you are wanting to take advantage of the reforms? If your business is facing challenging operating conditions you should seek prompt, specialist advice to reduce the risks and consequences of financial failure and increase the options available.

For any specific or general queries regarding your business, or to discuss the availability of the defence, please get in touch with one of our qualified and experienced experts.

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