Changes to Insolvency Laws Due to COVID-19

Changes to Insolvency Laws Due to COVID-19

On 22 March 2020, the Federal Government announced a range of temporary measures to provide relief to businesses across Australia who are currently, or will shortly, experience extreme pressure due to the evolving COVID-19 pandemic.

The Government introduced and passed temporary legislation which provide individuals and companies with certain forms of financial and regulatory relief in times of financial distress.

Temporary relief provisions and how this may affect your business

An important basis in order to appreciate how the relief mechanisms will work and the benefits provided, is to understand the following terms fully:

Statutory Demands

A statutory demand is a document issued by a creditor to a debtor company. The statutory demand requires the debtor to pay the debt it owes within the specified time period. There is a minimum debt threshold which must be due and owing before the demand can be made and the specified time period is usually 21 days.

After the expiry of this time period, if:

  • the debt is not paid (or an arrangement regarding payment of the debt has been agreed between the parties); or
  • an application to set the statutory demand aside has not been commenced,

the debtor company is presumed to be insolvent. I.e. unable to pay its debts as and when they fall due.

This presumption of insolvency provides a basis to the creditor to commence court proceedings to wind the debtor company up.

Insolvent Trading

The determination of whether a company is trading while insolvent can be complex, and a variety of factors should be considered. However, as a general rule, a company can be determined to be trading insolvent when it cannot pay its debts as and when they fall due and continues to operate and incur further debts.

One of the key obligations on a company director is to ensure that that the company does not trade while insolvent. If a company continues to trade while insolvent, whether in an attempt to rescue the company or otherwise, its director/s can be at risk of personal liability, civil and criminal fines, and disqualification in light of this breach of their important duties.

Specifically, a director can be found to have breached their duty to prevent insolvent trading if:

  • they are a director of a company at the time when the company incurs a debt;
  • The company is insolvent when it incurs the debt or becomes insolvent because it incurs the debt;
  • When the company incurs the debt, there are reasonable ground for suspecting that the company is insolvent or would become insolvent by incurring that debt and the director is aware of this (or a reasonable person would be so aware).

In short, a director must not allow the company to incur debt at a time when the company is insolvent, or the company becomes insolvent because of that debt. The director claiming, they were unaware that this was the case, is not a defence given the obligations on a director to ensure they maintain and informed position.

Bankruptcy

Bankruptcy is a legal process where, as an individual you are declared unable to pay your debts. An individual can enter into Voluntary Bankruptcy or a creditor, that an individual owes money to, may also make an application to court to make an individual bankrupt.

Relief measures

The temporary relief measures are as follows:

  • Temporary increases to the threshold at which creditors can issue a statutory demand (from $2,000 to $20,000);
  • Temporary increase to the threshold at which creditors can initiate bankruptcy proceeding (from $5,000 to $20,000);
  • Increased time periods for responses to statutory demands and bankruptcy notices from 21 days to six months;
  • Temporary relief for directors from insolvent trading liability (although egregious cases of fraudulent or dishonest insolvent trading may still attract criminal actions).

How long will these concessions last?

The amendments are designed to be repealed six months after the day on which they commence, although there is scope for them to be extended. Any extension will largely depend on how the Covid-19 pandemic has evolved over the coming months and the effects that this has had on business and the economy as a whole.

Caution should still be maintained

Importantly, the changes to statutory demands and bankruptcy notices apply to those documents which are served on or after the commencement of the emergency law.

The intention behind the temporary relief for directors from insolvent trading liability is to increase confidence for companies to continue to trade through the Pandemic, with the aim of returning to viability once it has passed. It is important to note that this temporary relief only relates to debts incurred in the ordinary course of business. For example, debts that are incurred which are deemed necessary to facilitate the continuation of the business during the 6-month period. The requirement to repay the debts will remain whilst the company continues to trade.

Despite the allowances, it remains important for directors, as usual, to remain fully informed of the financial status of the company both currently and in respect of the long-term projections.

How can Ramsden Lawyers Assist?

At Ramsden Lawyers, we have a team of experienced insolvency lawyers who have remained apprised at all times of the relevant changes in the law and their implications. We are able to assist you in interpreting the new provisions, how they affect you and importantly what the effects may be in the future, or if you simply require advice regarding your current status generally.

We are currently offering free initial consultations to those clients who may have concerns in this area or wish to gain further advice on how the provisions apply specifically to their circumstances.

Please contact us to book your initial consultation with one of our experienced team members.