How firms can help clients navigate changes to insolvency laws

By Jerome Doraisamy|25 March 2020

As part of its economic response to COVID-19, the federal government has made changes to insolvency laws – which lawyers will have to help clients navigate.

The major changes outlined by the federal government, as part of its stimulus package in the wake of the global coronavirus pandemic, are “twofold”, says Herbert Smith Freehills partner Paul Apathy.

Speaking to Lawyers Weekly, Mr Apathy said: “The first allows for directors to be temporarily relieved from the risk of personal liability for insolvent trading, where the debts are incurred in the ordinary course of business.”

“The second increases the minimum threshold at which creditors can issue a statutory demand from $2,000 to $20,000, and allows companies six months to respond to a statutory demand rather than the current 21 days. These temporary measures apply for a six-month period, and commence on the day after the [bill] receives royal assent. There is no retrospective application.”

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The changes are intended to “avoid unnecessary insolvencies and bankruptcies by providing a safety net for directors and businesses”, so as to help them operate during a temporary period of illiquidity rather than enter voluntary administration or liquidation, and individuals to assist them with managing debt and avoiding bankruptcy, Mr Apathy said.

“On the flip side, creditors may find it harder to collect debts from corporates during this period, as statutory demands will be less effective,” he mused.

When asked how best can law firms be assisting clients impacted by these changes moving forward, Mr Apathy said that firms can assist by helping clients understand the temporary amendments and how they apply to the client’s individual circumstances.

“For businesses that were successful and profitable prior to the COVID-19 outbreak, this may be the first time the directors of the business have needed advice in relation to insolvency laws,” Mr Apathy outlined.

“Law firms can provide guidance such that firms can continue to trade through this downturn rather than appoint external administrators while adhering to the changes.

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“Law firms can also assist clients by advising on any further changes to insolvency and corporations laws applicable to the client’s circumstances, advice on related legislation such as the existing safe harbour regime, and when these temporary amendments are reversed, advice on the legislation prior to the temporary amendments.

“Lastly, law firms can assist suppliers and other creditors to businesses suffering from financial distress that may require advice on how to manage counterparty risk, including potentially changing trading terms.”

This all said, Mr Apathy stressed that there are a handful of aspects of the temporary regime that “remain uncertain”.

“For instance, care will need to be taken by directors to ensure a debt incurred is in the ordinary course of business. The term ‘ordinary course of business’ is intended to be widely interpreted, to facilitate transactions with a view to saving the business, but this is an area of potential uncertainty. For example, would a debt incurred as part of a rescue financing be considered to be incurred in the ordinary course of business?” he said.

“For this reason, there is expected to be some overlap between the temporary measures and the existing safe harbour provisions, and directors may therefore seek to rely on both regimes during the next six months to obtain protection under both regimes for debts incurred where there might be ambiguity.”

Moreover, Mr Apathy continued, it appears the temporary regime contemplates the use of regulations to restrict certain circumstances in which a director may not be able to rely on the interim safe harbour relief.

“It is unclear what those circumstances are, and there are no draft regulations yet available. This provides some uncertainty for directors, though if the amendments are to have the desired effect then presumably any exceptions will be reasonably narrow and targeted,” he said.

How firms can help clients navigate changes to insolvency laws
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