The unprecedented restrictions on business arising from the COVID-19 coronavirus pandemic are proving extremely challenging for many otherwise profitable and viable businesses.
In response, the government has passed the Coronavirus Economic Response Package Omnibus Act 2020 (the Coronavirus Response Act) which is effective from 24 March 2020.
The measures introduced are designed to help businesses and individuals cope with cash flow difficulties caused by the pandemic and the government’s response to it.
Apart from the measures to provide additional cash to small and medium enterprises, there are some significant temporary changes to the insolvency laws that will provide relief to companies and individuals. For 6 months from 25 March 2020:
- Creditors cannot issue statutory demands unless the debt is at least $20,000 (up from $2,000);
- Creditors cannot issue a bankruptcy notice unless the debt is at least $20,000 (up from $5,000);
- The time to respond to a statutory demand or a bankruptcy notice will increase from 21 days to 6 months;
- A director will not be personally liable under the insolvent trading provisions if the debts were incurred in the ordinary course of business in the 6 month period from 25 March 2020. Relief will not apply to criminal conduct involving intent, such as dishonesty or fraud.
What the law means for creditors and debtors
The temporary changes to the insolvency laws are significant. The changes mean creditors will be unable to take the usual low-cost steps of issuing a statutory demand or bankruptcy notice to seek to recover outstanding debts of less than $20,000. Even if a debt is more than $20,000, a debtor will have 6 months to pay which will put a strain on the creditor’s own cash flow.
What the law means for directors
The changes also mean that directors have 6 months to try to trade a company out of insolvency, without the fear of an insolvent trading claim being brought against them if the company is subsequently placed into liquidation.
The measures are designed to prevent the liquidation of companies and the bankruptcy of individuals who are suffering from temporary cash flow shortages due to the coronavirus will go some way to giving business and individuals in financial distress some breathing space.
However, stakeholders must keep in mind that:
- Directors can be liable for claims for insolvent trading for debts incurred after the 6 month period.
- Directors, related parties, creditors and other stakeholders can still be liable for other claims under the Corporations Act 2001, such as:
a) claims against directors for breaching their duties to a company under sections 180, 181, or 182 of the Corporations Act 2001; b) claims against directors and related parties in respect of unreasonable director-related transactions under section 588FDA of the Corporations Act 2001; c) claims against creditors for unfair preferences under section 588FA of the Corporations Act 2001; d) uncommercial transaction claims under section 588FB of the Corporations Act 2001.
For directors and companies, this means that professional legal and accounting advice should be sought to put in place a clear plan that takes advantage of the relief given without exposure to additional risks.
Shine Lawyers insolvency law experts are here to help you through these uncertain times. Contact our team today for an obligation-free consultation.
Insolvency terminology explained:
- Insolvency - a company or person is insolvent if they are unable to pay debts as and when they are due.
- Creditor - an individual or company that is owed money.
- Statutory Demand - a formal demand for payment on a company that, if not complied with in the time required, can result in a court application to place the company into liquidation.
- Bankruptcy notice – a formal demand for payment issued to an individual based on a final judgment or order that, if not complied with, can result in a court application to bankrupt the individual.
- Insolvent trading – a company incurring debts when it is already insolvent.
- Debtor – a person who owes money.
- Liquidation - a company’s assets are sold by a liquidator to pay the company’s debts.
- Bankruptcy – an individual’s assets are sold by a trustee to pay the individual’s debts.
Written by Shine Lawyers. Last modified: April 9, 2020.