On 28 March 2020, the Government proposed certain insolvency law reforms in response to the COVID-19 crisis, including a temporary suspension of wrongful trading provisions for company directors.

The measures are intended to apply retrospectively from 1 March 2020 for three months, and aim to encourage directors to continue to trade during the pandemic.

Last week, the Government announced a number of measures to provide financial support to businesses struggling with the impact of COVID-19, including two new Government-backed funding schemes.

Addleshaw Goddard is monitoring those measures closely, with our latest updates found here.

Notwithstanding, it is inevitable that we will see more companies collapse over the coming months, as they struggle to cope with the indefinite business disruption.

The Australian Parliament has passed legislation granting temporary relief for businesses from statutory demands and liability for insolvent trading. Individuals will also be granted temporary relief in relation to bankruptcy notices.

Introduction

The Australian Parliament has passed a suite of temporary insolvency measures to combat the economic impacts of coronavirus. The changes, which are expected to come into effect shortly, will provide temporary relief from statutory demands and liability for insolvent trading.

It is a defence to an unfair preference claim to show there were no reasonable grounds to suspect the insolvency of the debtor company.

Referred to as the ‘good faith defence’, the creditor has the onus of establishing the defence contained in section 588FG(2) of the Corporations Act 2001 (Cth).

Suspicion of insolvency

The courts have identified the following principles with respect to the good faith defence:

In the recent case of 1st Fleet Pty Ltd (in liquidation), the Court clarified the information disclosure obligations of external administrators in the Insolvency Practice Schedule (Corporations) (IPSC) and Insolvency Practice Rules (Corporations) 2016 (Rules).

There is only a short time period for compliance, and there can be cost consequences for non compliance.

In business it is not uncommon for a director of a company to be owed money by that company.

If the commercial relationship breaks down, the director may think it is an option to serve a creditor’s statutory demand on the debtor company.

However, recent court decisions demonstrate that issuing a creditor’s statutory demand is not a sure fire method of obtaining payment where the director is owed the debt personally or is a director of both the creditor and debtor companies.

Cases where statutory demands have been successfully challenged

In the recent court decision of Trenfield v HAG Import Corporation (Australia) Pty Ltd [2018] QDC 107, the liquidators recovered unfair preferences from a retention of title creditor who argued it was a secured creditor.

The issues

In the recent decision of Heavy Plant Leasing [2018] NSWSC 707, a creditor successfully defended an unfair preference claim by establishing it did not have reasonable grounds to suspect the insolvency of the debtor company, who was a subcontractor in the earth moving business.

The most common way of defending a liquidator’s unfair preferences claim is to rely upon section 588FG(2) of the Corporations Act 2001(Cth); commonly called the ‘good faith defence’.

Commonly, a creditor being sued by a liquidator to refund an alleged unfair preference is owed money by the company in liquidation.

Liquidators argue that under section 553(c)(1) of the Corporations Act 2001 (Act) a creditor is not able to set-off the outstanding indebtedness owed by the company to the creditor to reduce any liability of the creditor to refund any unfair preference. Similar arguments are made by liquidators in relation to insolvent trading claims.

A snapshot of the court decisions

Just because a liquidator asserts you have received an unfair preference, does not necessarily mean you have or that there are no potential defences available to you.