Coronavirus and corporations – temporary relief for affected companies (or should that be infected?!)

The global COVID-19 pandemic is causing chaos in more ways than one. The impact on the economy has been disastrous and Australian companies, particularly small to medium businesses are really feeling it. Amid growing concern as to the capacity of Australian businesses to cope with the economic challenges of the coronavirus pandemic, the Federal Government is offering temporary relief to financially distressed businesses.

More time to pay your debts

Ordinarily, a person (or creditor) who is owed at least $2,000.00 by a company can take steps to recover that amount in accordance with section 459E of the Corporations Act 2001 (Cth) (the Corporations Act). You might have heard of a creditors’ statutory demand. Under the Government’s temporary measures, for the next 6 months, only creditors owed $20,000.00 or more may issue a statutory demand on a company.

Normally a company is required to respond to a statutory demand within 21 days after the demand is served. That is, the company either has to pay the amount claimed in the demand, or make an application in court to set the demand aside on the basis that there’s a genuine dispute about the amount claimed or some other fault with the demand. If the company fails to respond within that time, it is presumed that the company is insolvent and the creditor can make application to have the company wound up. Under the temporary measures, companies will now have 6 months to respond to statutory demands issued against them.

Both of these measures are obviously designed to give companies a bit of breathing space in times where there is so much pressure on cash flow. The lockdowns are wreaking havoc with the cash flow of all businesses, not just those industries that have effectively been shut down.

Directors temporarily relieved from personal liability for insolvent trading

Typically, directors of companies have a positive duty under the Corporations Act to ensure their company does not trade while it is insolvent. Directors of companies that trade while insolvent may be held personally liable under section 588G of the Act. However, for the next six months, directors will be temporarily relieved of their duty to prevent insolvent trading with respect to debts incurred in the ordinary course of the company’s business.

All this sounding too complicated? Here is a hypothetical example:

Adam and Bronwyn are directors of a company that operate a pub, “Goatslegs”. Unfortunately, due to social distancing measures implemented to combat the coronavirus, business has slowed down. They are offering take away food and selling via their bottle shop, but they have lost about 70% revenue as a result of the bar and gaming machines being closed. As a result, the company is no longer able to pay is debts when due.

Chloe and David are suppliers to Goatslegs and are owed $10,000.00 and $20,000.00, respectively, in debts incurred in the ordinary course of business.

Under the new measures:

Chloe will not be able to issue a statutory demand against the company for the $10,000.00 that is owed to her.
David will be able to issue a statutory demand against Goatslegs to recover the $20,000.00 owed to him. David will have the right to enforce this debt through the courts.
If David serves on the company a statutory demand, the company will be required to respond within 6 months of service. If the company fails to respond within 6 months, the company is presumed to be insolvent and David could make application to wind Goatslegs up.
Let’s say Chloe and David agree to keep supplying Goatslegs even though it can’t pay for the supplies on usual trade terms. Despite being unable to pay debts incurred in the ordinary course of business, Goatslegs can stay open and serve customers and continue to order supplies even though technically it is trading insolvently – Adam and Bronwyn will not be held personally liable for insolvent training.
The company will still be required to pay any debts incurred.

The common sense approach is required by all business at the moment. While the economy is at a stand still and cash flow is, well, isn’t really ‘flow’, everyone has to work together. We will come out of this and at some point everyone’s trade will get back to normal. We all hope it’s sooner rather than later.

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Coronavirus and corporations – temporary relief for affected companies (or should that be infected?!)