Insolvency, Bankruptcy and Employment Law in the age of Coronavirus (COVID – 19)

27 Mar Insolvency, Bankruptcy and Employment Law in the age of Coronavirus (COVID – 19)

Changes to Insolvency and Bankruptcy Law – Coronavirus Economic Response Package Omnibus Bill

On 24 March 2020, new legislation was introduced which changes the rules for issuing bankruptcy notices, statutory demands, and extends safe harbour provisions for insolvent trading.

Bankruptcy Notices and Statutory Demands

Under the existing laws, it is an act of bankruptcy for an individual to fail to comply with a bankruptcy notice within 21 days or such other longer time specified in the notice (Bankruptcy Act 1966 s40(g)). The new legislation amends the Bankruptcy Act 1966 by providing that the period to be specified in the notice may be either 21 days or any other period prescribed by the regulations, currently being 6 months (s41(2A)).

The minimum amount of the debt required to issue a notice of bankruptcy must now also be $20,000 as prescribed by the regulations (previously $5,000).

These changes are also reflected in the Corporations Act 2001, as it relates to issuing a statutory demand against a Company. The regime relating to statutory demands was amended on 25 March 2020 by the Coronavirus Economic Response Package Omnibus Act (‘the Act’). Prior to the Act, it was a deemed act of insolvency by a company to fail to comply with a statutory demand within the period set out in the legislation, formerly 21 days (Corporations Act 2001 s459F). The new legislation has the effect that the minimum period for compliance is now 6 months and the minimum amount of debt is to be $20,000.

The Act meant that there was not the run on credit insurance in Australia that was seen in Europe, as most credit insurance policies require an insolvency type event before a claim can be made.

The Act was due to cease on 15 October 2020, however on 7 September 2020 it was announced by the Federal Government that the changes would be extended until 31 December 2020.

Insolvent Trading – Safe Harbour s588GAAA

The safe harbour provisions under the Corporations Act 2001 have been extended to provide that a director will not be in breach of their duty not to trade while insolvent (pursuant to s588G) where a debt is incurred:

• In the ordinary course of business;
• In the 6 months following the commencement of the legislation on 24 March 2020 (or any other longer period which may be prescribed by the regulations); and
• Before a liquidator, administrator is appointed during that period.

Stand Down of Employees as a result of Government Directions

In addition to the changes above, the issuing of government directions to restrict certain activities has forced some businesses to close resulting in the difficult decision to stand down employees without pay. The rights and obligations of both employees and employers are regulated by the existing legislation under the Fair Work Act 2009.

An employer may stand down an employee without pay during a period when the employee is not ‘usefully employed’ due to a stoppage of work outside the employers control (Fair Work Act 2009 s524(1)(c)). The circumstances in which employees may be stood down may be varied by an award, agreement or contract applicable to the employee.

A ministerial or government direction to stop business (i.e the closure of certain services) is considered stoppage of work for the purposes of the Act, provided that the employee cannot be usefully employed in some other capacity during that period. Therefore businesses which are forced to close as a result of government restrictions can rely upon s524 to stand down employees without pay. During the stand down, the employee is entitled to use their paid leave entitlements.

If an employee can still be utilised by the employer in some other capacity, but the business is experiencing shortage of work or a down turn in business as a result of the government directions or the current economic climate,  the usual laws regarding redundancy will still apply. Any termination of those employees will be subject to the laws on redundancy under the Fair Work Act.

If you are an individual or business who may be impacted by the changes to the insolvency and bankruptcy law or require advice in relation to your rights as an employer/employee in the current circumstances, Harris & Company Solicitors is able to provide advice. Contact ismith@harrisco.com.au or 02 9261 8533.