To protect the economy from the ongoing pandemic, the Government announced changes to the Corporations Act. Garth O’Connor-Price explains what has changed.

On 25 March, the Government effected changes to the Corporations Act to protect the economy from the stress of the ongoing pandemic. Understanding these changes and what hasn’t changed can help you protect against:

  • Being held personally liable for Company debts incurred, and
  • Losses from trading with insolvent customers and on Director / Shareholder Loans.

What has changed?

  1. Relief from insolvent trading

Relief has been provided to Directors who act in good faith from insolvent trading claims for the period of six months from 25 March 2020. Insolvent trading is the act of incurring debt whilst the company is insolvent, and this debt remains outstanding at the point of liquidation. A liquidator can bring an action against a Director personally for these debts.

An example of how the relief will work in practice is:

We have Jim who runs a chain-link fencing manufacturing business with expenses in the form of rent, wages and wire. Jim’s company becomes insolvent on 1 April 2020; however, he keeps trading until 31 December 2020 when his business cannot trade any longer and a liquidator is appointed. As at the appointment of a liquidator, 6 months of rent is outstanding, no outstanding wages and the wire supplier is owed money for two orders of wire, one on 1 July and one on 1 November. A Liquidator could pursue Jim for the wire ordered on 1 November but not the order placed on 1 July as this will  qualify for the relief. There is no claim relating to wages and no claim in relation to the outstanding rent because it relates to an event (being the signing the lease) that happened prior to the company becoming insolvent. If it is deemed that the company was insolvent prior to 25 March, debts incurred before this date could also be included in an insolvent trading claim.

  1. Enforcing debts

The threshold to enforce a debt via a statutory demand against a corporation has increased from $2,000 to $20,000; whilst serving a bankruptcy notice on an individual requires a debt of $20,000 or greater, up from $5,000.The debtor now also has six months to respond to the demand or notice, whereas previously it had 21 days to do so.

What hasn’t changed?

  1. Director’s Duties

There has been no amendment to the statutory duties imposed on Directors by the government in response to the pandemic. Duties such as acting in good faith remain and if there is a suspicion of insolvency, the Director’s priority switches from the shareholders to the creditors of the company.

In this regard, you can protect against the risk of personal liability by applying principles of the Safe Harbour regime. This regime was brought in to protect directors against insolvent trading claims; however, it can equally apply to claims for breaches of directors’ duties.

Practicing the Safe Harbour principles noted below will protect against a claim for a breach of director duties:

  • Scrutinising the financial position of the company
  • Applying the “better outcome for creditors” test to all action taken
  • Seeking independent expert advice; and
  • Documenting the decision-making process.

Insolvent trading laws and director duties are drafted in a way that doesn’t prohibit directors from taking risks, as long as they can point to documentation and mount the argument that at the time the action was taken; it was reasonably likely to result in a better outcome for creditors than not taking the action and running the risk of a death by a thousand cuts or the alternative of placing the company into liquidation immediately.

  1. Risk of losses

The risk of losses from trading with insolvent customers or loaning personal funds on an unsecured basis to a business remain, and if anything has increased in this time of uncertainty.Directors should protect their businesses and themselves from these risks by utilising the power of the Personal Property Security Register (‘PPSR’).The PPSR is a regime used to determine the priority to assets in the events of liquidation. There are two types of interests that can be registered:

  1. An All Present and After Acquired Property (AllPAAP)

This type of registration covers all the assets of the company and the kind of interest held by a bank or financier (including a Director or Shareholder).

An AllPAAP will grant the holder:

  1. Power to influence the destiny of the company (secured creditors are not automatically bound by an external administration unlike unsecured creditors).
  2. Priority over unsecured creditors (and in some cases employees) to funds realised from company assets.
  3. Purchase Money Security Interest (‘PMSI’)

A PMSI secures is a specific asset such as inventory (supplied on ROT terms) or equipment subject to a hire purchase agreement. If registered correctly it gives the holder super priority over all other creditors in respect of that asset; including the bank/financier and employees.Our advice would be if any customer comes to you seeking a variation of terms or requesting deferral of payment in the coming weeks; that a non-negotiable in these discussions is for their consent to register an interest against the assets supplied to the customer.


The suspension of insolvent trading laws mean Directors shouldn’t make hasty or rash decisions about their businesses; however, the relief should only be utilised if there is a reasonable expectation of a viable business at the other side of this pandemic. If there is a reasonable expectation, the safe harbour principles can help you build that bridge to get to the other side. An increase in the requirements to enforce debts means that businesses should be more selective in who they trade with and remember that the PPSR is your friend when it comes to dealing with financially distressed customers and injecting personal funds into your business.

Garth O’Connor-Price is Principal, Recovery & Insolvency, William Buck. William Buck is a leading firm of Chartered Accountants and advisors with offices across Australia and New Zealand.

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