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.

Each year amendments are made to the rules that govern how bankruptcy cases are managed — the Federal Rules of Bankruptcy Procedure. The amendments address issues identified by an Advisory Committee made up of federal judges, bankruptcy attorneys, and others. The rule amendments are ultimately adopted by the U.S. Supreme Court and technically subject to Congressional disapproval.

Only A Few Rule Amendments This Year. Unlike previous years, there are only four rule amendments expected to take effect on December 1, 2019. Here they are:

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:

A Big Answer To A Big Question. After dividing the courts for a number of years, we finally have the answer to the big question of whether rejection of a trademark license by a debtor-licensor deprives the licensee of the right to use the trademark. Here’s the question on which the Supreme Court granted certiorari in the Mission Product Holdings, Inc. v Tempnology, LLC case:

The US Supreme Court decided what the International Trademark Association (INTA) called "the most significant unresolved legal issue in trademark licensing" when it ruled on May 20, 2019, that bankrupt companies cannot use bankruptcy law to revoke a trademark license.

In its 8-1 decision, the court resolved a circuit split by holding that a debtor's rejection of a trademark license under Section 365 of the Bankruptcy Code, which enables a debtor to "reject any executory contract" (a contract that neither party has finished performing), amounts only to a breach of the license.

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.

As discussed in an earlier post called “Moving Up: Bankruptcy Code Dollar Amounts Will Increase On April 1, 2019,” various dollar amounts in the Bankruptcy Code and related statutory provisions were increased for cases filed on or after today, April 1, 2019.

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

The Supreme Court held oral argument earlier today in the Mission Products v. Tempnology case, on the issue of the effect of rejection by a licensor of a trademark license on the licensee’s rights.

An official notice from the Judicial Conference of the United States was just published announcing that certain dollar amounts in the Bankruptcy Code will be increased about 6.2% this time for new cases filed on or after April 1, 2019.