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COVID-19 Australia: Directors & Officers - temporary amendments to corporation and insolvency law

  • 26 March 2020 26 March 2020
  • Asia Pacific

  • Coronavirus

COVID-19 Australia: Directors & Officers - temporary amendments to corporation and insolvency law


The Australian Federal Government announced temporary amendments, effective 24 March 2020, to insolvency and corporations law in response to the challenges that businesses are facing as a result of the COVID-19 crisis. These amendments provide a safety net to businesses in challenging times to foster survival for those businesses once the crisis has passed.

In particular, the government intends to reduce the risk of businesses being unnecessarily pushed into insolvency and reduce the risk of personal liability for insolvent trading as a result of debts incurred in the ordinary course of business. The amendments are particularly relevant in an environment where many measures of a business’ solvency are fluid as the broader COVID-19 circumstances evolve.

We discuss the new amendments briefly below as well what implications this might have for insurers and their insureds.


The government has introduced the following amendments in an attempt to create a safety net for businesses:

Statutory Demands

  • Increase in the threshold at which creditors can issue a statutory demand or bankruptcy notice from $2,000 to $20,000. This will apply for 6 months.
  • Allowing companies 6 months, rather than the current 21 days to respond to a statutory demand that has been served on them. This will apply for 6 months.

Insolvent Trading

  • Temporary relief for directors from any personal liability for trading while insolvent arising from debts incurred during the ordinary course of business. This will apply for 6 months.

  • Egregious cases of dishonesty and fraud will still be subject to criminal penalties and any debts incurred will still be payable by the company.

Powers provided to the Treasurer

  • Temporary flexibility in the Corporations Act 2001 (Act) for the Treasurer to provide targeted relief for companies from provisions of the Act, to deal with unforeseen events that arise as a result of the Coronavirus health crisis. This temporary power will apply for six months.

Temporary changes to ASIC enforcement powers

  • The Australian Securities and Investment Commission (ASIC) has the power to offer relief from some provisions or to take no action for not complying with some provisions. However, this requires companies to make individual requests to ASIC.

Implications for Industry:

The measures introduced by the government are unprecedented; however, considering the economic climate drastic measures in the corporations and insolvency law context are necessary. A good start.

The temporary amendments to the Corporations Act will help cushion the immediate impact on business and Directors from short term illiquidity issues and (hopefully) encourage the prospects of long term solvency

The Increase in the threshold statutory demand minimum to $20,000 and an extension of the time for companies to respond will assist small business in particular. Staving off recovery or winding up proceedings for outstanding debts of low value will smooth what is already an incredibly challenging time for small business, particularly in the hospitality, entertainment, tourism and sport sectors.

The extended response time on stat demands will also provide Directors with an opportunity to take stock of a Company’s financial position and properly evaluate the Company’s ability to continue as a going concern where a company's solvency status is changing almost by the day.

Connected to that, relaxation of the insolvent trading provisions gives further breathing room to companies whose solvency status is extremely fluid. Of course, the other side of that is that creditors should be wary and mindful some businesses in peril might be able to continue to assume debt despite it potentially being all but assured they will fail under the current pressures.

The overarching theme is the Federal Government’s recognition that the highly volatile and uncertain business environment requires agile and adaptable regulation. The language of the amendments reflects the simple rationale behind the Government's thinking - Flexibility is needed and reasonable 'loosening' of the existing law in this area will assist business in these difficult times.

Implications for Corporate Insurers:

The amendments, being positive for corporates/small business, are net positive for corporate and D&O insurers. The insolvent trading provisions in particular might just keep some companies afloat that might have otherwise have failed and resulted in claims by creditors and shareholders.

This is the first however in what we anticipate to be a wave of measures to assist business, corporates and the economy more broadly. Insurers should take some comfort in the government being proactive and on the front foot (for now) in protecting their insureds.

It is still early days and while the measures are a good starting point, there is no doubt the global pandemic creates increased risk to corporate Australia and their directors and officers in the context of potential litigation, increased impetus to claim to recover losses and pressure on corporates to exploit any available policy cover – the implications for insurers follows.

That is however the long term outlook, in the short term, the priority will be vigilance as the crisis unfolds and internal stability as that deteriorates externally.

In an age of increasing scrutiny on corporates and their directors and officers and higher standards of accountability for failing to manage risks, we do not doubt litigation funders and Plaintiff firms will be monitoring the corporate environment and actively investigating directors breach of duties claims and breach of continuous disclosure claims in relation to that entity's response to the rapidly changing risk landscape. The heightened risk of insolvency for companies over this period only amplifies the risk of those claims and difficulty or delay by cash strapped insureds in paying claim deductibles can also be expected.

There has already been a Covid-19 related securities lawsuit filed in the US against a cruise line so we will need to monitor the experience there and in Europe, where the pandemic is far more advanced.

It is a moving feast and the outlook generally is as anticipated - the pandemic poses significant risks for insureds and thus their insurers. Watch this space.


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