It's totally legal to store the hashed value with your live database as normal to provide authentication, and store the plain text version in a write only file on a separate system to try and give some additional level of security. This isn't a great solution, but it does provide hashed passwords for regular work, and plain text for when the police ask for it.
It's obviously a pretty stupid law, but to say it "outlaws" hashed passwords is just nonsense.