Insolvency and bankruptcy law changes to prop up businesses during coronavirus
With Australian businesses closing their doors due to the coronavirus crisis, business owners need to understand the insolvency and bankruptcy law changes brought in by the government to help them ride out the economic storm.
Temporary safety net minimises the threat of insolvency and bankruptcy to financially distressed businesses
Several changes to insolvency and bankruptcy laws have been enacted to provide interim relief to companies from statutory demands and liability for insolvent trading during the COVID-19 pandemic.
Under the Coronavirus Economic Response Package Omnibus Act 2020, there are also temporary changes for individuals with bankruptcy notices. The main amendments include:
- An increased threshold for issuing a creditor’s statutory demand from $2000 to $20,000.
- An increased threshold for commencing bankruptcy proceedings from $5,000 to $20,000.
- An extended period for responding to a creditor’s statutory demand or bankruptcy notice from 21 days to six months.
- An extended period within which unsecured creditors cannot take action to recover a debt against a debtor who declares an intention to present a debtor’s petition from 21 days to six months.
- Removing directors from personal liability for trading whilst insolvent in relation to debts incurred in the ordinary course of business. The time to comply with statutory demands is extended from 21 days to six months.
By increasing the minimum debt required and increasing the time a creditor has to comply with a statutory demand, the government is trying to provide breathing space for businesses to deal with their creditors during the coronavirus crisis.
Interim insolvency and bankruptcy laws will only apply over the next six months
Pivotal to the Coronavirus Economic Response Package Omnibus Act are the words, “in the ordinary course of business”. The temporary changes are intended to apply to a debt incurred while continuing a business over the next six months when everyone is effectively in lockdown and income is squeezed. This could include taking out a loan to pay employees, shift operations online or implement a new process to enable home delivery.
However, there are pitfalls. The Act does not protect a director for debts incurred before its introduction on March 25. It only applies to debts incurred during the next six months. This means that directors still must act with care and diligence if taking on debt and need to determine that it’s for a proper purpose.
Obtaining specialist legal advice before deciding to go into debt is well advised. This crisis could last far longer than six months, and directors could face future litigation if they’re unable to comply beyond the specified date.
Temporary changes to insolvency and bankruptcy laws form part of economic stimulus package
The government’s economic stimulus package has been introduced to help Australians and businesses survive the impact of coronavirus. The economic stimulus package aims to support business investment, provide cash flow assistance to small and medium-sized businesses, help keep employees in their jobs, provide support for the most severely affected communities and provide household stimulus payments.
Also included in the economic stimulus package is a cash flow boost for employers, to ensure small and medium-sized business can continue to operate, pay bills and retain staff during the COVID-19 crisis.
The government has also adjusted regulatory settings to help small businesses access credit. Providing an exemption from responsible lending obligations, lenders can move quickly to better support their business customers who have an existing borrowing relationship with them.
Another important initiative included in the package is the $130 billion JobKeeper payment, giving workers a flat payment of $1,500 before tax each fortnight.
Importance of understanding benefits and potential pitfalls of government’s economic plan
It’s vital that business owners and managers who have been hit by the economic downturn during this pandemic make sure they are fully aware of these temporary changes to insolvency and bankruptcy laws, as well as what they are entitled to within the economic stimulus package.
To gain a comprehensive understanding of the economic plan and what impact it could have on your business, it’s wise to obtain expert legal advice. This will ensure your business is given the best chance to survive the pandemic.
For more information please see Liabilities of directors and managers during the coronavirus pandemic and “Help, I can’t pay my employees any more” – options for employers during the coronavirus pandemic.