The substantial economic effects, fears and uncertainties triggered by the coronavirus pandemic have caused deep financial pressures for many business owners. To help, the Australian Government has introduced important but temporary changes to current insolvency laws.
If you’re struggling to pay your business debts and it’s causing you financial distress, these changes will give you a reprieve. However, it will remain important to act quickly to resolve the situation and take the right countermeasures.
Businesses afforded more time before needing to commence insolvency proceedings
A business is considered to be insolvent when it is unable to repay its debts on time or in full. According to the amended laws, business owners will now be allowed more time and leniency to repay their debts before needing to undertake insolvency proceedings. These changes will be valid for six months from 25 March 2020, until 25 September 2020.
These measures have been designed to help businesses cope with serious cash flows difficulties and allow them to continue to trade.
What has changed?
The basic changes include the following;
- An increase in the amount of debt a business can hold before the creditor can make a statutory demand for payment from $2000.00 to $20,000.00.
- An extension in the time a debtor has to respond to a creditor demand for payment from 21 days to 6 months.
- An increase in the time a debtor has to respond to a bankruptcy notice from 21 days to six months. It is hoped that this extension of time will allow for debtors to make arrangements for repayment thereby reducing the need for the bankruptcy to come into fruition.
- If a business decides, voluntarily, to file for bankruptcy, the unsecured creditors will have to wait longer to make a claim against the business to recover debts owed to them. This time frame will also increase from 21 days to six months.
- Finally, to assist individuals the government has increased the rate of debt from $5,000.00 to $20,000.00 before a creditor can initiate bankruptcy proceedings.
How does this affect personal liability?
According to standard Australian insolvency laws, Directors of corporations cannot trade if the business is insolvent.
However, keeping in mind the extenuating circumstances of the pandemic, the government has allowed Directors to be exempt from personal liability temporarily if they continue to trade when insolvent. The hope is that allowing businesses to continue to trade will enable them to repay debts and continue to operate beyond this challenging period. Directors will be liable again after the six-month grace period which ends on September 25, 2020.
Will these temporary rules be extended?
Given the current lockdowns in Victoria, there is a chance the temporary changes to insolvency rules will be extended. Until this is confirmed, however, businesses which have been shielded by these changes should prepare for a return to the normal rules at the end of September. If you’re concerned your business will be insolvent following the deadline, its best to put an action plan in place now.
Rolf Howard, Managing Partner, Owen Hodge Lawyers
