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.
This is the second litigation involving the furlough scheme in the insolvency context, following on from Re Carluccio's (in administration). Please refer to our note on Carluccio's for background reading on how the furlough scheme weaves into insolvency law.
Issue
In the first litigation involving the Furlough scheme, the court in Re Carluccio's (in administration) ruled on how the administrators can lawfully give effect to furlough arrangements with the employees who have agreed to the variation of their employment contract.
Read on for our analysis of the case which gives an interesting insight into how the courts in the future might interpret the furlough scheme.
1. Background
Carluccio’s in administration
GENERAL INSOLVENCY LANDSCAPE IN GERMANY PRE-COVID-19
Without undue delay upon occurrence of illiquidity or overindebtedness, at the latest within three weeks, members of the representing body of a legal entity have to apply for the opening of insolvency proceedings over the assets of such entity
INSOLVENCY REASONS:
CORONAVIRUS RESPONSE – INTRODUCING FLEXIBILITY TO DIRECTORS' DUTIES?
IN LIGHT OF COVID-19, THE UK GOVERNMENT RECENTLY ANNOUNCED ITS INTENTION TO TEMPORARILY SUSPEND THE OFFENCE OF WRONGFUL TRADING BY DIRECTORS OF UK COMPANIES. THIS WILL INEVITABLY HAVE A WIDE-RANGING EFFECT ON BOTH DIRECTORS AND CREDITORS.
The economic impacts of COVID-19 are unexpected and significant. While the Australian Government has announced a number of temporary reforms to address these impacts, there remains risk for directors of companies that are unable to pay their debts as and when they are due.
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 Government has announced significant temporary measures to ensure that our insolvency laws and processes do not expose companies and individuals to undue risk. This will hopefully avoid a potentially unprecedented wave of insolvencies.
Key takeouts
The Government announced a six month suspension of insolvent trading laws.
The relevant debts will still be due and payable by the company in the normal way.
The Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 was passed by both houses of Parliament on 5 February 2020, with an amendment made by the Senate to review the operation and effectiveness of the legislation after five years accepted by the House of Representatives.
There is no doubt Australia has done well in its response to the COVID-19 pandemic. Many companies and individuals have been able to obtain some economic relief through a range of Government policies and initiatives, and some generous concessions in relation to financing arrangements, which may have otherwise crippled some businesses.