Coronavirus crisis triggers short-term relaxed insolvency laws.

Michael Chesterman March 24, 2020
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It distresses me to even contemplate how many businesses operating in the construction industry will eventually succumb to some form of insolvency as a result of the coronavirus (COVID-19) crisis (event).

These are extraordinary times and as such, it cannot be ‘business as usual’ in terms of how the construction industry is regulated in terms of insolvency.

In an article in the Financial Review dated 17 March 2020, it is stated:

“PwC says the federal government should consider whether the liability that directors face personally under Australia’s strict insolvent trading laws could be temporarily relaxed, arguing this would add to the support banks are providing to help business customers survive the coronavirus pandemic.

PwC partner and insolvency industry veteran, Stephen Longley, says he’s already seen an increase in inquiries from businesses concerned about their ability to survive a downturn that could decimate revenue.”

Elsewhere in the article, Stephen Longley is quoted:

“What we don’t want is directors feeling that personal liability and pulling the trigger too early, or pulling the trigger at all,” Longley tells Chanticleer.

“You are going to have businesses that don’t have any revenue, or their revenue may drop significantly. They might go broke trying to do the right thing by hanging on and retaining their employees.”

 Government was listening.

The Commonwealth Government has responded to such calls. On 22 March 2020, the Government announced a second set of economic responses which included an initiative to address this issue.

A fact sheet outlining the temporary relief for financially distressed businesses states:

“The elements of the package are: 

  • A temporary increase in the threshold at which creditors can issue a statutory demand on a company and the time companies have to respond to statutory demands they receive;
  • A temporary increase in the threshold for a creditor to initiate bankruptcy proceedings, an increase in the time period for debtors to respond to a bankruptcy notice, and extending the period of protection a debtor receives after making a declaration of intention to present a debtor’s petition;
  • Temporary relief for directors from any personal liability for trading while insolvent; and
  • Providing temporary flexibility in the Corporations Act 2001 to provide targeted relief for companies from provisions of the Act to deal with unforeseen events that arise as a result of the Coronavirus health crisis.

For owners or directors of a business that are currently struggling due to the Coronavirus, the ATO will tailor solutions for their circumstances, including temporary reduction of payments or deferrals, or withholding enforcement actions including Director Penalty Notices and wind-ups.”

Directors should not see these allowances as a ‘get out of jail’ card.

In an article in the Financial Review dated 24 March 2020, it is stated:

“University of NSW professor of commercial law Pamela Hanrahan said directors must be careful because the moratorium did not override obligations to act with “reasonable care” or to act in the best interests of the company such as considering creditor interests.”

 Furthermore, as indicated in the above-mentioned fact sheet:

“Egregious cases of dishonesty and fraud will still be subject to criminal penalties. Any debts incurred by the company will still be payable by the company”.

Phoenix activity will not be tolerated under these temporary relaxed laws.

Illegal phoenix activity is when a new company is created to continue the business of a company that has been deliberately liquidated to avoid paying its debts. On the ATO website, it is stated:

“Phoenix activity doesn’t just impact those people directly affected. It deprives the whole community of necessary funds that could have contributed to hospitals, roads, education and other essential services. We are committed to stamping out this activity and prosecuting the worst offenders to the full extent of the law.”

Is there a safe harbour for a sinking ship?

This was the title of an article I published on 19 September 2017 on the passing of the Treasury Laws Amendment (2017 Enterprise Incentives №2) Bill 2017. The Explanatory Notes state:

“The amendments in Schedule 1, Part 1 of this Bill will create a safe harbour for company directors from personal liability for insolvent trading if the company is undertaking a restructure outside formal insolvency. This will drive cultural change amongst company directors by encouraging them to keep control of their company, engage early with possible insolvency and take reasonable risks to facilitate the company’s recovery instead of simply placing the company prematurely into voluntary administration or liquidation.” 

The law was devised to keep financially distressed businesses operating in certain circumstances.

I am unaware of any construction business who to date has successfully utilised these provisions. It may be that this event will create many opportunities for businesses to be able to appropriately rely on them.

Final thoughts.

The Coronavirus Economic Response Package Omnibus Act 2020 (Cth) was assented on 24 March 2020. This Act temporary amends the Corporations Act 2001, giving effect to the initiatives outlined in this article.

The responsibility to avert insolvent trading, and the accompanying personal liability for directors, will not apply to debts incurred by a company, on or after 24 March 2020 for 6 months. This period can be extended by regulation. For detailed information in relation to this temporary initiative, I refer readers to chapter 12 of the Explanatory memorandum.

For any businesses operating in the construction industry concerned about trading insolvent, I can only strongly recommend that they promptly talk to trusted, knowledgeable, qualified and experienced advisors.

I will publish more articles on how I believe all laws, regulations and policies relating to the construction industry must be urgently reviewed by governments. I have heard it said many times that this is a one in hundred-year event. Consequently, the regulation of the industry must be temporarily adjusted to reflect this reality.

Not intended as legal advice. Read full disclaimer.
Michael Chesterman March 24, 2020

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