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COVID-19 Insolvency Update: Extension to the Temporary Relief for Financially Distressed Businesses

Nahum Ayliffe, Walter MacCallum and Joe Denina

Updated 15 September 2020

On 7 September, the Federal Government announced that it will extend the temporary insolvency and bankruptcy protections implemented under the Coronavirus Economic Response Package Omnibus Act 2020 (Act), which was passed by both Houses of Parliament on 23 March 2020 and enacted into law on 25 March 2020. The insolvency and bankruptcy protections implemented under this Act were scheduled to expire on 24 September 2020, but now expire on 31 December 2020.

Schedule 12 of the Act provides relief to individuals and businesses facing financial distress due to the COVID-19 crisis by effecting temporary changes to the Corporations Act 2001 (Cth) (Corporations Act), the Bankruptcy Act 1966 (Cth) (Bankruptcy Act) and the regulations to those Acts.

Schedule 8 of the Act empowers the Federal Treasurer to make further temporary changes to the Corporations Act to mitigate against further harm that may arise from the COVID-19 crisis.

Below is a summary of the key changes that under the Federal Government’s proposed Regulations (not yet released) are expected to be extended until 31 December 2020.

Summary of Extended Temporary Relief for Financially Distressed Businesses

  • Statutory Demands – A temporary increase to the minimum threshold for creditors issuing statutory demands against debtor companies from $2,000 to $20,000. A company in receipt of a statutory demand will have 6 months to respond to a statutory demand instead of the usual 21 day period.
  • Insolvent Trading – Company directors are temporarily relieved of their duty to prevent insolvent trading pursuant to Section 588G of the Corporations Act as long as they incur company debts in the ordinary course of business. What constitutes the “ordinary course of business” is a broad concept. Of course, cases of dishonesty and fraud by company directors will remain subject to criminal penalties.
  • Bankruptcy – A temporary increase to the minimum threshold for a creditor to initiate bankruptcy proceedings against an individual debtor from $5,000 to $20,000. A debtor served with a Bankruptcy Notice will have 6 months to respond to that notice instead of the usual 21 day period. The period of protection against the claims of unsecured creditors that arise when a debtor declares an intention to enter voluntary bankruptcy is extended from 21 days to 6 months.

All of the above temporary changes will apply until 31 December 2020, once the Regulations are passed.

None of the temporary changes which have been extended prevents creditors from enforcing their debts against companies or individuals through the Courts. In other words, you can still sue a debtor company or individual to recover outstanding debts.  Secured creditors may also enforce their security, including security interests arising pursuant to the Personal Property Securities Act 2009 (Cth).

It remains to be seen what impact this will have on creditors who like many, will need to recover debts in order to generate sufficient cash flow to survive themselves. Creditors may decide to commence Court proceedings rather than wait until the temporary measures end, noting that the measures may be subject to further extension(s). . The temporary measures may prompt a general tightening of credit terms between suppliers and buyers of goods and services as a consequence and quite possibly, a significant shift, for some suppliers at least, from credit terms to COD supply arrangements only.

For owners or directors of businesses that are currently struggling, the Australian Taxation Office is offering to tailor solutions to their businesses, including temporary reduction of payments or deferrals, or withholding enforcement actions including Director Penalty Notices and wind-ups.

Russell Kennedy will be monitoring these developments and provide further updates.

We are here to help

If you require further information, please call Walter MacCallum (Sydney) on 0417 771 535, Rory Maguire(Melbourne) on 03 8602 7246Nahum Ayliffe (Melbourne) on 0413 022 940,Joe Denina (Sydney) on (02) 8987 0029 or a member of our Corporate and Commercial team. 

If you would like to stay up to date with Alerts, news and Insights from our team, you can subscribe to our mailing list here.

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