Article By: Anastasia Balis, Lawyer Cappello Rowe Lawyers Sydney

COVID-19 – Insolvency law changes

The Commonwealth Government recently announced temporary changes to insolvency laws in light of COVID-19.

Purpose of changes

The purpose of the changes is to provide temporary relief for financially distressed individuals and businesses, by avoiding unnecessary bankruptcies and insolvencies to provide:

1. Businesses with a safety net to enable them to continue to operate during a temporary illiquid period, as opposed to entering into voluntary administration or liquidation; and
2. Individuals with a safety net to manage debt and avoid bankruptcy.

The temporary amendments were introduced through Schedule 12 of the Coronavirus Economic Response Package Omnibus Act 2020 (Act) and took effect from 25 March 2020.

Summary of Changes

We outline the changes implemented by the Federal Government and how they may impact your business below.

Bankruptcy

1. Involuntary bankruptcy proceedings: The minimum threshold for a creditor to initiate voluntary bankruptcy proceedings has increased from $5,000 to $20,000. This will apply for 6 months.
2. Bankruptcy Notice and declaration of intention to present debtor’s petition: The minimum threshold to issue a bankruptcy notice has increased from $5,000 to $20,000. The time to respond to a bankruptcy notice has increased from 21 days to 6 months and the period of protection for a debtor once they make a declaration of intention to present a debtor’s petition has increased from 21 days to 6 months. This will apply for 6 months.

Statutory Demands

3. Statutory Demands: The minimum threshold for a creditor to issue a statutory demand has increased from $2,000 to $20,000. The time taken for debtors to respond to a statutory demand has also increased from 21 days to 6 months. This will apply for 6 months.

Insolvent Trading

4. Directors may rely on the new temporary “safe harbour” provision, in which directors will be removed from personal liability for insolvent trading with respect to debts incurred in the ordinary course of the company’s business. This will apply for 6 months.

The Explanatory Memorandum mentions that a director is taken to incur a debt in the ordinary course of business if it is necessary to facilitate the continuation of the business during the 6 month period (for example, obtaining a loan to move part of the business online or incurring debts by continuing to pay employees during the COIVD-19 pandemic). Case of dishonesty and fraud will remain subject to criminal penalties and the company will be liable for debts incurred.

At this stage, the above changes will be in force for 6 months. However, it is possible that if the COIVID-19 restrictions continue, the time frame may be extended.

Therefore, it is important to consider other appropriate debtor recovery enforcement mechanisms that are not affected by the changes. As it stands, creditors may continue to commence debt recovery proceedings against companies and individuals though the Courts (subject to any changes in court procedures and hearing availability during this time).

Cappello Rowe are always here to help. Feel free to call our office on 6962 3433 or email us at info@cappellorowe.com.au