To help businesses cope with the devastating impact that COVID-19 has had on the economy, the Government has introduced unprecedented changes to insolvency laws. These changes aim to help businesses stay afloat for longer, and will provide some momentary relief from debt. Here we breakdown what the key changes to insolvency laws are and how they will affect your business.
1. Statutory demands
Minimum debt amount
Statutory demands are an effective way for creditors to commence legal action to recover a debt, and often come after other demands have failed to be met. If you don’t comply with, or dispute a statutory demand, a presumption of insolvency will be made. After this, your company will be wound up by Court order. Previously, the threshold for issuing a statutory demand was $2,000 or more. However, current circumstances mean that businesses may struggle to pay their invoices on time. To help businesses survive, this threshold will be increasing to $20,000. However, this will only be in effect for 6 months. After this, the minimum debt amount will revert to $2,000.
Deadline to comply with or dispute statutory demand
Issuing a statutory demand and winding up a company in the Courts system is a fast-moving process. However, the Government has extended this to allow businesses proper time to review their options when they cannot pay a debt. Businesses which are issued with a statutory demand will now have 6 months to dispute the debt or repay it. This is a significant extension from the previous timeline of 21 days. This means that an indebted business will not be presumed insolvent until 6 months after you issue a statutory demand. This may be inconvenient for creditors, however the Government is seeking to ensure that businesses have the best chance possible to survive the coming months.
2. Commencing bankruptcy proceedings
Bankruptcy notices
Sole traders are subject to the provisions of the Bankruptcy Act 1966 (Cth). Bankruptcy proceedings can be initiated for debts of $5,000 or more. However, the Government has announced that this will increase to $20,000. Further, when a bankruptcy notice is issued, a debtor normally has 21 days within which to respond. This has been extended to 6 months, giving businesses the opportunity to find alternate methods of payment.
Protection period for debtors
For businesses who are in debt, lodging a Declaration of Intention (DOI) to file a debtor’s petition is an act of bankruptcy. However, this does not make you bankrupt. When you file a DOI, there is usually a 21 day period within which creditors cannot recover debts. Debtors will now have 6 months to review their options, and in which creditors cannot take legal action to enforce repayment.
3. Insolvent trading
The Corporations Act 2001 (Cth) states that it’s illegal for a company to continue trading whilst insolvent. However, it will likely be hard for many businesses to avoid insolvency during the COVID-19 crisis. For the next 6 months, insolvency laws will change to revoke personal liability for trading whilst insolvent. This is in the hope that businesses will return to solvency once the crisis eases off and the companies will be able to repay their debts. However, it’s important to bear in mind that directors will still be liable for fraud or other criminal conduct.
Finally
Although these changes to insolvency provisions are only intended to last for 6 months, they may mean the difference between otherwise solvent businesses getting through the current crisis or shutting down. In addition to other measures aimed to assist with cashflow and paying employees, businesses will at least find some relief from the uncertain times that lie ahead. If you have further questions about keeping your business solvent or repaying your debts, we recommend that you get in touch with a business lawyer.
