COVID-19 Changes to Insolvency Laws

ABBOTT ADAMS TURNAROUND ADVISE ON

New Changes to Insolvency Laws:
Do They Affect Your Business?

The effects of the COVID-19 pandemic have changed the outlook for many businesses, no matter their size or industry and will continue to impact the way we do business in the future.

The sudden LOCKDOWN changes and the associated issues and uncertainties caused by working from home have immediately impacted on many businesses having enough cash flow to meet the new trading position. Many Business owners are questioning should they continue trading during these uncertain times.

In response, upon March 25th 2020, the Coronavirus Economic Response Package Omnibus BU12020 came into effect, which made a few temporary changes to the Corporations Act 2001 and the Bankruptcy Act 1966.

These temporary changes to the legislation for businesses to CONTINUE TO TRADE even when being presumed insolvent or possibly becoming bankrupt, has the ability to assist Sole Traders and Directors of companies, if they also seek advice from qualified entities or individuals experienced in the Pre-Insolvency or Solvency industries.

It is to be realised the temporary changes have not been put into place to simply allow for entities or individuals to simply keep trading whilst insolvent and without consequence.

What’s the Difference Between Insolvency and Bankruptcy?

Before we explain the new changes to Australia’s insolvency and bankruptcy laws, it is important to understand the difference between these two concepts and what they mean for business owners across the country.

Insolvency is a term that refers to the Corporation Act which states that if someone is unable to pay their debts when they are, due then they are insolvent.

The first (and probably most important) change to insolvency laws is increasing the threshold for issuing a statutory demand for companies.

Before the new laws were made, creditors were allowed to issue a statutory demand on a debtor company, when the company owed a liquidated debt of at least $2,000. Previously, the debtor would then have 21 days to pay that debt.

If still unpaid AFTER 21 days, and no defense to set aside a Statutory Demand or Creditors Petition is filed within the statutory 21 days, the company would then be presumed insolvent under the Corporations Act.

The creditor would then be in a position to issue a form 509 to Wind up the company as being presumed insolvent.

From 25 March 2020 to December 31st 2020 when the Coronavirus Economic Response Package Omnibus is to be repealed, the temporary changes to the Corporations law have allowed the debt threshold to be raised.

Creditors can now only serve a statutory demand on a debtor company if it owes a liquidated debt of no less than $20,000. This change also means that the 21-day period to respond and or pay the debt off has now been increased to 6 months.

Changes to Bankruptcy Laws

In the business world, bankruptcy really only applies to individuals, such as Sole traders.

Before the new laws were passed, creditors could send a Bankruptcy notice against an individual (or sole trader) if they owed a debt of at least $5,000. The limit has now increased from $5,000 to $20,000  albeit such limit is temporary.

Similar to statutory demands, individual debtors had 21 days to respond to a Bankruptcy notice.

During this time, individual debtors facing insolvency could voluntarily apply for bankruptcy, and creditors generally would not be able to take any further action for 21 days afterward.

Bankruptcy is when a Sole trader or individual can no longer pay off their debts. An individual declaring bankruptcy, releases them from their obligations to pay off those debts (but this still means their debt is recorded on the national credit reporting web sites as a party that has been bankrupted),

Remember,  Bankruptcy is a word not a sentence.

For further information do not hesitate in contacting our office to discuss options:

  • Potential to Annul Bankruptcy using section 73
  • Prior to filing for bankruptcy why not enter Creditors Deed of Trust
  • Prior to filing for bankruptcy why not try Part X

Remember, as of 25 March 2020 until December 31st 2020, the debt threshold has been raised. Additionally, debtors now have up to 6 months to respond to a bankruptcy notice (rather than the original 21 days). And, if an individual debtor were to voluntarily apply for bankruptcy, unsecured creditors cannot take further action against them for 6 months afterward, rather than the originally prescribed Statutory 21 days.

Protection from Directors’ Personal Liability for Insolvent Trading

Under the Corporations Act, company directors have a duty to prevent insolvent trading by their company, these changes in the law means a company directors could be personally liable for insolvent trading because the company incurred a debt while it was insolvent, or was made insolvent by incurring that particular debt.

A director can be found personally liable even if they had reasonable grounds to believe that the company was solvent when trading during that time nor would it become insolvent by incurring that debt, because their balance sheet shows net assets greater than liabilities, unfortunately their advisors should have told them that the balance sheet has nothing to do with the question of solvency.

Under the recent changes to the law, directors are now temporarily relieved from this responsibility, provided they have sourced and engaged parties that are experienced in solvency laws and turnaround of businesses.

However, take note: despite this temporary relief being granted to company directors, that Directors may still face criminal penalties if debts are alleged to be incurred dishonestly or fraudulently during the period from 25 March 2020 to 31st of December 2020 and can still be issued Director Penalty Notices by the Australian Taxation Office.

Where to Next?

In the business world, bankruptcy is the process for personal insolvency, that only applies to Sole traders who have their own Australian Business Number (ABN). Individuals that cannot pay their debts when they fall due can also use the bankruptcy laws, thus allowing them to start again, as they have learned from their mistakes.

If you are an Incorporated company, then insolvency is a little more complex, because the fiduciary obligation a director has to the shareholders and the Corporation Act must be shown to have been complied with.

The Corporations Act sets out processes for how companies need to act when they are no longer able to pay off their debts and advise that the legislation known as “Safe Harbour” needs to be used and that independent assistance from qualified parties that understand insolvency are sourced and engaged.

If the director is charged with any offences against the Corporations Act then Bankruptcy can be used but it is not really an option a director should think will resolve the problem.

With COVID-19 changing the business landscape, business owners have had to make decisions quickly to respond to different lockdown laws, challenges caused by working from home, many inconveniences, and extra costs.

Currently, the Australian Securities and Investment Commission (ASIC) is the regulator of the Corporations Act and upon receiving a complaint either from the Public or Liquidators, about an alleged breach of the Corporations Act by a Director, then ASIC have the discretion to decide if they take any action to pursue the Director or alternatively not to take any enforcement action at all.

In the face of COVID-19, where there are time and cost pressures at play and the fact that there is major concerns and uncertainty about businesses surviving and or their Director surviving during and after the Covid-19 measures have finished. This uncertainty and the economic downturn effecting all businesses Australia wide, will be considered, particularly if the company already has substantial debts to pay off, no realisable assets from the company or the Director, then it would not be viable to proceed against the Director.

Key Reminders are:

These temporary changes to the law, aim to give individuals and businesses the opportunity to continue operating during the COVID19 pandemic, and having engaged a party that understands Insolvency and Safe Harbour Laws put the director and the company in the best position possible to return to financial viability and having ongoing sustainability once the pandemic is over.

While none of the changes affect creditors’ abilities to enforce their debts, the likely outcomes of these temporary changes will be a reduction in the use of Creditor’s Statutory demands and Bankruptcy notices as debt recovery mechanisms for the 6 month period, and once debt collectors are aware of the engagement of a party that understands Insolvency and Safe Harbour Laws, that part will be assisting their client to have the ability after 25th March 2020 to put up arguments such as 459s and solvency argument inclusive of reports.

Need Help Understanding Where You Stand?

If you do not understand the latest changes regarding Insolvency Laws, or wish to seek “Safe Harbour” we can help you.
Please email us to establish a FREE 30 minute consultation.