House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon. Josh Frydenberg MP)

Chapter 12 Temporary relief for financially distressed individuals and businesses

Outline of chapter

12.1 Schedule 12 to this Bill provides temporary relief for financially distressed individuals and businesses.

Context of amendments

12.2 The economic impacts of the Coronavirus could see numerous individuals at risk of bankruptcy and Australian businesses at risk of insolvency. To avoid unnecessary bankruptcies and insolvencies, Schedule 12 to this Bill provides:

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a safety net to help businesses to continue to operate during a temporary period of illiquidity, rather than enter voluntary administration or liquidation; and

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a safety net to individuals to assist them with managing debt and avoiding bankruptcy.

Summary of new law

12.3 The amendments in Schedule 12 to this Bill temporarily increase the minimum amount of debt required to be owed before a creditor can initiate involuntary bankruptcy proceedings against a debtor from $5,000 to $20,000.

12.4 The amendments also:

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temporarily provide debtors more time to respond to a bankruptcy notice - the period is extended from 21 days to six months; and

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temporarily extends the timeframe in which a debtor is protected from enforcement action by a creditor following presentation of a declaration of intention to present a debtor's petition - the period is extended from 21 days to six months.

12.5 The amendments increase the statutory minimum for a creditor to issue a statutory demand to a debtor from $2,000 to $20,000. This raises the thresholds for creditor demands that can push businesses into insolvency.

12.6 The amendments also temporarily provide debtors more time to respond to a statutory demand - the period is extended from 21 days to six months.

12.7 Finally, the amendments provide temporary relief for directors from their personal duty to prevent insolvent trading.

Comparison of key features of new law and current law

Detailed explanation of new law

Amendment relating to individuals in financial distress

12.8 New definitions of default period, statutory minimum and statutory period are inserted to allow a period longer than 21 days, or an amount greater than $5,000, to be prescribed in the Bankruptcy Regulations 1996. Existing references to an amount of $5,000 with respect to the statutory minimum are removed and updated to reflect that the statutory minimum may be increased. The default period, statutory minimum and statutory period are new concepts for the Bankruptcy Act 1966.

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The default period is the timeframe in which a debtor is protected from enforcement action by a creditor following presentation of a declaration of intention to present a debtor's petition.

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The statutory period is the timeframe in which a debtor must comply with a bankruptcy notice.

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The statutory minimum is the minimum amount of debt required to be owed before a creditor can initiate voluntary bankruptcy proceedings against a debtor.

[Schedule 12, item 1, subsections 5(1), 41(1), 44(1) and 244(1) of the Bankruptcy Act 1966]

12.9 The Bankruptcy Regulations 1996 prescribe a temporary increase to the definition of statutory minimum, statutory period and default period in the Bankruptcy Act 1966. The temporarily increased statutory minimum and statutory period are $20,000 and six months, respectively. The temporary increased default period is six months. The new regulations are repealed six months after the day on which they commence. Consequential amendments are made to Form 1 in Schedule 1 to the Bankruptcy Regulations 1996 to allow the form to continue to be used if the statutory period is temporarily increased. [Schedule 12, items 16, 17, 18 and 19, regulation 4.02.AA, 4.10A and paragraph 1 and (note) of Form 1 of Schedule 1 to the Bankruptcy Regulations 1996]

12.10 The definition of stay period is amended to allow the stay period to extend for the entire default period, if a default period longer than 21 days is prescribed in the Bankruptcy Regulations 1996. The provision is further amended to clarify that all items in the definition are alternatives. [Schedule 12, items 2 and 3, subsection 5(1) of the Bankruptcy Act 1966]

12.11 There is a new definition of time fixed for compliance with a bankruptcy notice. The time fixed for compliance is either the statutory period after the debtor is served with the bankruptcy notice in Australia, which is required to be specified in the notice, or the period specified by court order if the debtor is served with the bankrupty notice outside of Australia. Consequential amendments are made to sections 40, 41 and 42 of t he Bankruptcy Act 1966 to ensure consistency of terminology and to clarify that references to time periods in each provision are to the time fixed for compliance with a bankruptcy notice as newly defined. [Schedule 12, items 4, 5, 6, 7, 10 and 11, subsections 5(1), 33(1), 40(1), 41(1), 41(2) and 42(1) of the Bankruptcy Act 1966]

Amendments relating to businesses in financial distress

12.12 The Corporations Regulations prescribe a temporary increase to the definition of statutory minimum and statutory period in the Corporations Act. The temporarily increased statutory minimum and period is $20,000 and six months, respectively. The new regulation is repealed six months after the day on which it commences. [Schedule 12, item 26, regulation 5.4.01AA of the Corporations Regulations]

12.13 The definition of statutory period in the Corporations Act is amended to allow a period longer than 21 days to be prescribed in the regulations. [Schedule 12, item 21, paragraphs 9(a) and 9(b) of the Corporations Act]

12.14 Further amendments are made to allow for a longer period than 21 days to comply with a statutory demand and to apply for an order setting aside a statutory demand to be prescribed in the regulations. [Schedule 12, items 22, 23 and 24, paragraphs 459E(2)(c) and 459F(2)(b) and subsections 459G(2) and 459G(3) of the Corporations Act]

12.15 Consequential amendments are made to Form 509H in Schedule 2 to the Corporations Regulations to allow the form to continue to be used if the statutory minimum and statutory period are temporarily increased. [Schedule 12, items 27, 28 and 29, Form 509H of Schedule 2 to the Corporations Regulations]

Temporary relief for directors from duty to prevent insolvent trading

12.16 There is a new temporary, six-month period in which a new safe harbour from the directors' duty to prevent insolvent trading applies. The new safe harbour provides temporary relief from personal liability for insolvent trading where it applies.

12.17 A director may rely on the new temporary safe harbour in relation to a debt incurred by the company if:

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the debt is incurred in the ordinary course of the company's business;

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the debt is incurred during the six month period starting on the day the new law commences, or a longer period as prescribed by the regulations; and

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the debt is incurred before any appointment of an administrator or liquidator of the company during the temporary safe harbour application period.

12.18 A director is taken to incur a debt in the ordinary course of business if it is necessary to facilitate the continuation of the business during the six month period that begins on commencement of the subparagraph. This could include, for example, a director taking out a loan to move some business operations online. It could also include debts incurred through continuing to pay employees during the Coronavirus pandemic.

12.19 The regulations may prescribe circumstances in which the temporary safe harbour is taken never to have applied in relation to a person and a debt.

12.20 A person wishing to rely on the new temporary safe harbour in a proceeding in which unlawful insolvent trading is alleged bears an evidential burden in relation to that matter. A new definition of evidential burden applies in relation to the temporary safe harbour. Evidential burden means the burden of adducing or pointing to evidence that suggests a reasonable possibility that the matter exists or does not exist. [Schedule 12, item 31, section 588GAAA of the Corporations Act]

12.21 Similarly a holding company may rely on the temporary safe harbour for insolvent trading by its subsidiary if it takes reasonable steps to ensure the temporary safe harbour applies to each of the directors of the subsidiary, and to the debt, and if the temporary safe harbour does so apply. The holding company bears an evidential burden in relation to these matters. [Schedule 12, item 34, subsection 588WA(1) of the Corporations Act ]

12.22 Information or books are not admissible to support the temporary safe harbour in a proceeding in which unlawful insolvent trading is alleged if the person fails to permit the inspection of, or deliver the books of the company in accordance with a relevant notice. [Schedule 12, item 32, subsection 588GB(7) of the Corporations Act]

12.23 The Minister is not required to cause an independent review of the operation of the temporary safe harbour to be undertaken under section 588HA of the Corporations Act. [Schedule 12, item 33, section 588HA of the Corporations Act]

Application and transitional provisions

12.24 The amendments in Schedule 12 to this Bill will commence on the day after this Bill receives Royal Assent.

12.25 The amendments to the Bankruptcy Act 1966 apply to bankruptcy notices issued on or after the new law commences and petitions and declarations presented on or after the new law commences. [Schedule 12, item 15 of the Bill]

12.26 The amendments to the Corporations Act apply to statutory demands served on or after the new law commences. [Schedule 12, item 25, section 1669 of the Corporations Act]