COVID19 Crisis – Warning to Business Owners

  • Many struggling businesses are holding off on seeking professional advice due to the temporary six month relaxation to personal liability for insolvent trading.
  • This is a dangerous strategy. When the COVID19 Safe Harbour terminates in September, ceasing to trade and liquidation may be the only remaining option. 
  • If there has been no ‘better outcome’ assessment and courses of action taken to trade out of insolvency under the 2017 safe harbour, directors may be at serious risk of personal liability for debts incurred (click here for our offer through Business SA). 

COVID19 Outbreak – Salvation for Businesses 

  • The outbreak of COVID-19 presents new and unprecedented challenges for businesses across the globe. As the economy worsens, businesses are being urged to act now rather than later in order to set themselves up for tougher times.
  • The companies that survived the Global Financial Crisis took measures to stabilise business operations and balance sheets immediately. All companies should now look to do the same in the face of the crisis – it’s imperative that you take purposeful action due to the COVID19 crisis.
  • The COVID-19 pandemic poses a significant threat to many companies that are otherwise profitable and viable businesses.  Directors need to make urgent decisions regarding the continuation of trade and incurring debt.

COVID19 Crisis – Announcement 22 March 2020

The Federal Government’s COVID19 crisis action includes temporary amendments to legislation in light of the immediate and unexpected challenges posed to businesses. In summary, the proposed changes include:

  • relief from personal liability for directors from insolvent trading for a six month period;

  • increased threshold for statutory demands to $20,000 and increased timeframe for compliance from 21 days to six months for companies to respond to statutory demands; and

  • discretion for the Treasurer to amend the Corporations Act 2001 to grant relief to companies from certain obligations.

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Coronavirus Economic Response Package Omnibus Bill 2020 (Cth) – passed both Houses on 23 March 2020

The purpose of the new Bill, effective 24 March 2020 (day after Royal Assent), is intended to help businesses avoid unnecessary insolvencies and bankruptcies.

COVID action taken includes granting directors a ‘COVID-19 Safe Harbour’ (under s588GAAA). Directors are temporarily relieved from insolvent trading personal liability where company debts are incurred in the ‘ordinary course of business’. The temporary relief will operate alongside the existing Safe Harbour Regime (under s588GA) and will last six months.

The threshold for which creditors can issue statutory demands has also been increased to $20,000 for a period of six months, and the response time for companies to respond to statutory demands has increased from 21 days to six months.

Many directors will welcome these measures given the uncertainties surrounding the impact of COVID-19 on business operations and cashflow. It is expected that the measures will assist companies in continuing to trade through the COVID-19 period of disruption. The COVID19 action and legislative changes are to help companies continue trading through the current period of disruption without having to appoint a liquidator or voluntary administrator.  

Temporary relief for financially distressed businesses

The Bill further provides additional scope for temporary flexibility in the Corporations Act 2001 so that additional temporary and targeted relief can be granted from provisions of the Act that deal with unforeseen events that arise as a result of the pandemic.

It is stated that the ATO will adjust their approach for owners or directors of business that are currently suffering financial distress due as a result of COVID-19. This includes temporary reductions or deferrals of payments, or withholding enforcement actions (Director Penalty Notices and winding-up proceedings). Suspension of ATO Recovery Action is important as Safe Harbour doesn’t offer protection in this regard.

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The new COVID-19 Safe Harbour may provide some directors with sufficient temporary protection from concerns over insolvent trading personal liability. This might be the case where directors expect the company to recover quickly once the COVID-19 crisis fades away. However, directors will need to make sure the company is in strong position to pay the additional debts that were incurred during the course pandemic.

Directors will need to stay vigilant and ensure the scope of the safe harbour protection is adequate for returning the company to solvent trading. While it is acknowledged the 6 month period for the COVID-19 Safe Harbour could be extended, directors are better suited to seek shelter from the 2017 Safe Harbour that provides much broader protection and a greater range of options.