COVID-19 relief measures for companies

On 24 March 2020, the Federal Government passed the Coronavirus Economic Response Package Omnibus Act 2020 (Cth) (Act).  As a part of the Act, insolvency and corporations laws have been temporarily amended in light of the financial challenges businesses are facing in the wake of COVID-19.  The changes made are intended to avoid unnecessary insolvencies and bankruptcies by providing a safety net for companies and their directors during the pandemic.  This article will discuss the key changes.

Challenges for companies during COVID-19

A company is solvent if it is able to pay all its debts when they are due and payable.^[1]  The legal definition of insolvency focuses on a cash-flow test.  The current pandemic is likely to adversely impact the cash-flow and liquidity of companies.  Companies are needing to consider a variety of resources available to them to maintain their cash flows, such as:

• cash reserves;
• financial support from directors, associated companies or others;
• assets which may be realised in the short term;
• government support packages; and
• talking to banks, lenders, creditors, suppliers, landlords and the ATO to obtain accommodations or extensions for debts which are due.

If a company is unable to access alternative methods for financial support, it may have already crossed the line into legal insolvency.

Temporary safe harbour from insolvent trading

The Act provides a temporary safe harbour for directors from their duty prevent insolvent trading, under section 588G of the Corporations Act 2001 (Cth).  Under the Act, directors are relieved from personal liability for debts incurred when trading while insolvent where the debt is incurred:

• in the ordinary course of the company’s business;
• during the six (6) month period starting 25 March 2020; and
• before any appointment during this period of an administrator or liquidator.

This includes debts that are necessary to facilitate the continuation of the business, for example new borrowings or loans.  These changes are intended to increase confidence for companies to continue to trade through the COVID-19 pandemic, and give them the highest chance of returning to financial viability after the pandemic has passed.

Importantly, the new temporary safe harbours only provide relief for directors personally.  This means companies will still be liable for any debts incurred.  In addition, other potential personal liability of directors, for example for unpaid company taxes, will still apply.

New limits on statutory demands

There have also been modifications to the existing statutory demand regime.  Under the Act, the minimum threshold at which creditors can issue a statutory demand has increased from $2,000 to $20,000.  Additionally, companies will have six (6) months to respond to a statutory demand rather than the usual 21 days.

Importantly, the changes to the statutory demand system do not affect the ability of the creditor to obtain a court order or judgment for the amount owing to it.

Other measures

The Treasurer has been granted temporary legislative powers to amend the Corporations Act 2001 (Cth) to relieve businesses from their obligations or make further modifications.

In addition to the emergency Act, the Federal Government announced that the ATO will be implementing a variety of measures that assist companies during the COVID-19 pandemic.  These include:

• deferrals of payments including PAYG instalments, income tax assessments and fringe benefits tax assessments;
• allowing businesses on a quarterly reporting cycle to opt into monthly GST reporting in order to get quicker access to GST refunds;
• allowing businesses to vary PAYG instalments to zero for the March 2020 quarter;
• withholding enforcement actions including Director Penalty Notices and wind-ups; and
• remitting any interest and penalties incurred on or after 23 January 2020 that have been applied to tax liabilities

Takeaways

The Act is intended to relieve financial distress for companies as a result of the COVID-19 pandemic, with the aim of encouraging companies to continue to trade and have the best chance at returning to financial viability after the pandemic has passed.  It is important to note that directors must also ensure they are complying with their other duties, which have not been modified by the Act.  Further these are temporary changes, and are subject to change as the situation develops.

Links and further references

Legislation

Coronavirus Economic Response Package Omnibus Act 2020 (Cth)

Corporations Act 2001 (Cth)

Resources for businesses during COVID-19

Business Queensland – Coronavirus payroll tax relief

Business Queensland – Pandemic risk management for business

Coronavirus Economic Response Package Omnibus Act 2020 (Cth) Explanatory Memorandum

The Treasury – Support for Businesses

Further information

If you need advice on managing your business during the COVID-19 outbreak, please telephone me for an obligation free and confidential discussion.

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

[1] Corporations Act 2001 (Cth) s 95A.

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