As part of the government’s economic response to COVID-19 it provides temporary relief for financially distressed businesses. It aims to provide a safety net by reducing the threat of actions against businesses and attempting to provide confidence to directors to continue to trade during this difficult time.
To create that safety net, the government is temporarily changing elements of how creditor actions commence and director’s exposure to personal liability in an insolvency scenario, which include:
- Statutory demands against companies: threshold amount increased and time to respond extended.
- Bankruptcy notice against individuals: threshold amount increased and time to respond extended.
- Moratorium period for a ‘declaration of intention’ to present a debtor’s petition extended.
- Directors’ personal liability for insolvent trading paused.
The above measures will be in place temporarily for six months.
These legislative amendments received royal assent on 24 March 2020 and will be in place for six months—ending on 25 September 2020.
Statutory demand against companies
Issuing a statutory demand is a typical way for a creditor to take action to wind up (liquidate) a company. Once a statutory demand expires, the creditor can commence court proceedings to wind up a company.
Under the temporary measures, the minimum debt to issue a statutory demand will increase from $2,000 to $20,000 and the company’s time to pay or respond will increase from 21 days to six months.
Bankruptcy notice against individuals
Issuing a bankruptcy notice allows a creditor to take steps to bankrupt an individual. Once a bankruptcy notice expires, the creditor can commence court proceedings to seek a sequestration order to bankrupt an individual.
Under the temporary measures, the minimum debt to issue a bankruptcy notice will increase from $5,000 to $20,000 and the individual’s time to pay or respond will increase from 21 days to six months.
Moratorium extension on intending to go bankrupt
Under the Bankruptcy Act 1966, individuals can lodge a ‘declaration of intention’ to present a debtor’s petition with the Australian Financial Security Authority (AFSA) to temporarily restrain creditors taking further action. This allows an individual to make arrangements with creditors and if not successful, proceed to declare themselves bankrupt.
The period for this temporary restraint will increase from 21 days to six months. Be aware, if those individuals do not make themselves bankrupt at the end of the period, a creditor can use the declaration as a basis to apply to court to make the person bankrupt.
Personal liability for insolvent trading paused
Insolvent trading rules are being ‘paused’ to give company directors time and space to make business decisions without the pressure of personal liability during this troubled economic time. Directors will be relieved of the personal liability that would be otherwise associated with insolvent trading for a period of six months incurred in the ordinary course of the company’s business. Egregious cases of dishonesty and fraud will still be subject to criminal penalties.
The government has also advised that the Australian Taxation Office (ATO) will work with business owners/directors to find viable solutions, including temporary reduction of payments/deferrals, or withholding enforcement actions e.g. director penalty notices (under the DPN regime) and ATO winding up applications in court.
Click here for the government resources on this topic (and more).
The current environment can be very daunting and Worrells partners and staff are available to assist business owners that find themselves in a distressed position. We are experts in providing restructuring advice and can provide the guidance that may be needed in these difficult times.
Worrells has 29 insolvency experts across Australia ready to assist. Our advice is qualified, regulated and experienced to help all types of businesses, in all industries. If you have a contact within Worrells please call them direct or through your accountant or lawyer.
For a detailed analysis and examples of how these new insolvency rules will impact business, download our complimentary guide ‘New insolvency rules: what’s the impact on you and your business?’ Click here.