On 22 March 2020, the Australian Federal Government announced a raft of proposed temporary changes to insolvency laws in light of the financial distress and challenges COVID-19 has caused to Australian businesses.

The proposed changes are summarised below:

companies

Statutory demands

The Federal Government has recently introduced the Coronavirus Economic Response Package Omnibus Bill 2020 (Bill).

Schedule 12 of the Bill will provide relief to individuals and businesses facing financial distress due to the COVID-19 crisis by effecting temporary changes to the Corporations Act 2001 (Cth) (CorporationsAct), the Bankruptcy Act 1966 (Cth) (Bankruptcy Act) and the regulations to those Acts.

This week’s TGIF considers the recent case of In the matter of Newheadspace Pty Limited (in liq) [2020] NSWSC 173, where the Supreme Court of New South Wales set aside a liquidator’s examination summonses on the grounds of an abuse of process and failure to satisfy s 596B of the Corporations Act 2001 (Cth).

What happened?

As the social and economic disruption caused by coronavirus (COVID-19) continues to rapidly evolve, the boards of Australian companies are facing solvency related issues. These issues extend to the solvency of suppliers and customers, and the potential consequences of the appointment of a voluntary administrator.

Whilst Australia navigates the effects of COVID-19 including health authorities advising people to stay home to contain the spread of COVID-19, people are likely to consume less and spend differently. The ultimate impact on Australian businesses may be significant.

Government Economic Stimulus Package

A new 'safe harbour' regime was implemented in September 2017 to provide directors who were trying to save a business with protection from future insolvent trading claims. No one could have predicted how important that regime is about to become. Given the escalating stress that is being placed on businesses because of COVID-19, many otherwise successful businesses may risk meeting the definition of insolvency.

With the rampant spread of COVID-19 worldwide, there are increasing concerns as to the financial impact of the outbreak. With forced business closures a potential reality, it seems inevitable that the Australian economy is on its way to a recession.

It is therefore critical that directors of companies are fully aware of the extent of their duties and understand what they must do to comply.

This week’s TGIF examines In the matter of Bytecan Pty Limited (in liquidation) [2019] NSWSC 1910, in which the Supreme Court of New South Wales considered the scope of the advantage to an indemnifying creditor available under section 564.

The facts

During the second half of 2019, it was generally accepted that the US/China trade war was the most likely macroeconomic event that would precipitate a global slowdown. Even then, given the enormous amount of ‘dry powder’ capital that was available in the market, the downturn, if any, was expected to be mild.

What makes a contract an unprofitable contract which can be disclaimed by a trustee in bankruptcy without the leave of the Court under section 133(5A) of the Bankruptcy Act 1966 (Cth) (Bankruptcy Act)? Can a litigation funding agreement be considered an unprofitable contract when the agreement provides for a significant funder's premium or charge of 80% (85% in the case of an appeal)?