COVID 19 – Update – Changes to Insolvency Laws due to COVID-19 (23 March 2020)


Introduction

On Sunday 22 March 2020 the Federal Government announced a range of new measures to lessen the economic impact of the Coronavirus pandemic on Australian businesses and individuals.

These measures are radical and will come into effect almost immediately. At this stage it appears they will apply for the next six months. Broadly speaking they consist of various allowances and concessions to protect income and cash flow within the economy, for both individuals and businesses.

Ahead of our detailed report on the announcement, we want to alert clients to substantial changes that have been made in the areas of personal and corporate insolvency.

Changes to insolvency laws

For the next six months:

  1. Statutory demands against companies can only be used in relation to company debts exceeding $20,000 (up from $2,000).
  2. Companies will have 6 months to comply with the statutory demand, (up from 21 days).
  3. The personal liability of directors for company debts incurred while the company is insolvent has effectively been suspended.
  4. Bankruptcy notices can only be issued to individuals with eligible debts over $20,000 (up from $5,000), who will also have 6 months to comply;

Statutory demands

Until yesterday, a statutory demand was a document which, required a company to pay a debt within 21 days. If the company did not pay the debt or apply to set aside the demand within that time, it would be deemed to be insolvent and could be placed into liquidation. Although a statutory demand is not a debt collection tool, in practice they are widely used to short cut the relatively laborious court process.

The period for dealing with a statutory demand is now 6 months, and the minimum amount for which a statutory demand can be issued is $20,000. These changes are intended to ensure that the cash flow crisis we are about to experience does not result in an immediate wave of involuntary liquidations caused by debt collection activity.

Insolvent trading

Until this announcement, company directors could be personally liable for their company’s debts if they allowed the company to trade while insolvent – in other words, while the company could not pay its debts as and when they fell due.

This had the potential to spark a separate wave of voluntary liquidations, caused by directors closing down companies rather than becoming liable to pay company debts from their own pocket. The suspension of this personal liability will encourage directors to keep trading, although whether that turns out to be a good thing will depend on the director’s willingness and ability to successfully guide their business through this crisis.

What does it mean for you

  1. These changes will reduce the immediate pressure on financially distressed individuals and businesses, and will give them more breathing space to work out what to do.
  2. But just because a business can trade on, doesn’t mean it should. The breathing space should be used for a realistic assessment of the future. Some businesses will not survive this crisis. If a business must close, the sooner it does so, the better, both for owners and creditors. Get advice from a reputable insolvency practitioner.
  3. Debt collection has just got harder, and not just because of yesterday’s announcement. Creditors may experience social pressure to refrain from normal debt collection to help others through the crisis. Further legal restrictions on debt recovery are entirely possible. There are already practical problems with commencing and continuing legal action, because our courts are heavily affected by the implementation of COVID control measures.
  4. For now, collecting debts and putting companies into liquidation is still legally possible with the right advice. Commercially, a better option is to ascertain the ability of a business to repay money before extending credit. Of course, the universal application of normal commercial practices is the cause of both the cash flow crisis we are about to have, and the announcements made yesterday to stop it.

Part of the announcement yesterday was that the Treasurer now has power to temporarily modify the operation of the Corporations Act.  Further changes to the law could be sudden and profound. We will keep you posted.

For any further information, please contact:

Partner, Tom Darbyshiretdarbyshire@kottgunn.com.au

Partner, John Parkjpark@kottgunn.com.au

Special Counsel – Ryan Lennonrlennon@kottgunn.com.au