Temporary relief for financially distressed companies
As part of the its efforts to stem the effects of the COVID-19 pandemic on the Australian economy, the Federal Government has recently introduced a number of ‘safety net’ provisions designed to avoid financially distressed individuals and companies being forced into, respectively, bankruptcy and liquidation.
The objective is to allow them to continue trading where possible.
The reforms announced by the Federal Government are contained in the ‘Coronavirus Economic Response Package Omnibus Act 2020’ (Act). The Act has now passed both houses of Parliament and has received royal assent. The most important reforms are as follows:
The reforms will only apply for a period of six months, commencing from 25 March 2020. None of the reforms apply retrospectively and only apply to debts incurred during that six-month period unless that period is extended.
The reforms are limited and only designed to capture temporary liquidity crises which arise from COVID-19. For example, the reforms do not:
This means that distressed individuals and companies are still vulnerable to attack from many creditors and other stakeholders who may be minded to pursue their claims.
From a practical perspective, the reforms do not:
This means that, for many distressed individuals and companies, their problems are merely kicked down the road (and indeed compounded) over the six-month protection period, such that many will be forced to consider their insolvency options as that period comes to an end. Economic forces will cause the underlying health of distressed businesses to worsen and they will be exposed when the protection period comes to an end.
In the case of companies and their directors, it appears the reforms will work in unison with, but are more limited than, the ‘safe harbour’ provisions in the Corporations Act, as:
If we have learned nothing else from this pandemic, it is that change moves quickly and in directions we don’t expect. State Governments and the Commonwealth will continue to act in response to the crisis and more protective measures are expected to be adopted in the coming weeks and months.
Boards and individuals should continue to engage with, and seek advice from, their legal advisors about these matters especially given the quickly evolving landscape affecting Australia and the world.