Future Uncertainty – What lies within the proposed corporate insolvency reforms and how the reforms impact on creditor’s rights to issue Creditor’s Statutory Demands

On 20 October 2020 we wrote about the Commonwealth Government’s extension of its “temporary insolvency protections” until 31 December 2020 and the impact those temporary protections have had on businesses and commercial life in Australia.

On 17 November 2020 the Commonwealth Government released the Corporations Amendment (Corporate Insolvency Reforms) Regulations 2020 (Cth) (Proposed Regulations) as part of the corporate insolvency reforms proposed under the Corporations Amendment (Corporate Insolvency Reforms) Bill 2020 (Cth) (Insolvency Reforms).

The Insolvency Reforms in part continue the temporary restrictions imposed on a creditor’s ability to utilise the benefits and efficiencies of Creditor’s Statutory Demands (CSD) issued under the Corporations Act 2001 (Cth).

If a debtor company is “eligible” for temporary restructuring relief under the Insolvency Reforms and a creditor serves a CSD on a debtor company before 31 July 2021, then the creditor must give the debtor company 6 months from the date of service of the CSD to pay the debt due and payable which must be more than $20,000 (Proposed CSD Relief). This is a continued extension for any debtor company “eligible” for temporary restructuring relief from the normal 21 days to pay or have the CSD set aside and a threshold of $2,000 with respect to a CSD which existed before the “temporary insolvency protections” as referred to in our 20 October 2020 article and the proposed Insolvency Reforms.

For a company to be “eligible” for temporary restructuring relief under the proposed Insolvency Reforms:

  • the debtor company must be insolvent;
  • the debtor company must not have more than $1,000,000 of totally liabilities. Liabilities is defined in the proposed Regulation 5.3B.03 as: “any liability or obligation that is not contingent”;
  • that company has not previously been involved in restructuring or a simplified liquidation;
  • the director of the company must not have been involved in a restructuring or simplified liquidation in the last 7 years; and
  • the director of the company within the 12 months immediately preceding the commencement of the Insolvency Reforms has not been a director of a company that has been under restructuring or been the subject of a simplified liquidation process.

The Insolvency Reforms do not include a mechanism for publicising or policing “eligible” debtor companies, leaving creditors with uncertainty about whether the pre-temporary insolvency relief applies under the Corporations Act or whether the now Proposed CSD Reforms apply.

How will creditors know whether the debtor company is “eligible”?

What if a debtor company is “eligible” for temporary restructuring relief but does not take the necessary steps to appoint a restructuring practitioner? Should the debtor company enjoy the benefit of the Proposed CSD Reforms, if it does not appoint a restructuring practitioner?

Will it be for creditors to consider whether a company is “eligible” before issuing a CSD? If the debtor company then disputes or challenges the CSD on the ground of “eligibility” should the creditor make an election to:

  • proceed with a winding up application;
  • defend any application to set the CSD aside the debtor company makes; and/or
  • withdraw the CSD.

Because of the hurried nature of the proposed Insolvency Reforms and the many more questions that are likely to arise, we expect the Commonwealth Government will consider industry comment and answer all of the questions posed in relation to the proposed Insolvency Reforms, so as to avoid future “patching up”.

The continued risk is that the now Proposed CSD Reforms do not lead to more viable small to medium businesses becoming insolvent and needing to appoint a restructuring practitioner, only because the effect of the Insolvency Reforms has been to extend, by law, their credit terms and exposed them to cash flow risk and the inability to ascertain what is perhaps bad debt and manage accordingly.

At Kott Gunning we have an experienced, commercial and knowledgeable insolvency team ready to advise and assist you about the Insolvency Reforms, their impacts and how to manage them.

We can assist you understand and use the legal and practical requirements of the Insolvency Reforms now and in the future.

If you are a creditor and in any doubt, taking the relatively inexpensive step of issuing a CSD could be your best option for many reasons; ask us why.

If you are a debtor and are concerned about your risks of personal liability, you must act immediately, ask us how now.

Please contact us with your personal enquiry, we can help.

Emma Leys – Partner – eleys@kottgunn.com.au

Peter Mariotto – Special Counsel – pmariotto@kottgunn.com.au

The information published in this article is of a general nature and should not be construed as legal advice. Whilst we aim to provide timely, relevant and accurate information, the law may change and circumstances may differ. You should not therefore act in reliance on it without first obtaining specific legal advice.