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To support businesses experiencing financial distress throughout COVID-19, the Australian Government introduced measures to relax insolvency and bankruptcy rules in March. These changes were set to draw to a close by 30 September, but have now been extended until 31 December 2020.
Many commentators had predicted that the changes would need to be extended, especially with further lockdowns in place in Melbourne, in a bid to give businesses the opportunity to trade out of insolvency.
With insolvencies down 60 per cent this year compared to last year as a result of the temporary measures, there were fears once the measures ended at the end of September, there would be a spike in insolvencies. Any rise in insolvencies would result in increased unemployment and a decline in consumer and business confidence.
Many businesses will be breathing a sigh of relief at the extension of the measures.
So, what are the safeguards in place for businesses until December?
Temporary insolvency protections
Insolvency rules have been relaxed to 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 to $20,000.
- 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 6 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 6 months.
- Finally, to assist individuals the government has increased the rate of debt from $5,000 to $20,000 before a creditor can initiate bankruptcy proceedings.
Personal liability protections
Personal liability rules have been relaxed to include the following:
- Directors are temporarily resolved of personal responsibility for trading under conditions of possible or actual insolvency. This only applies to debts that are incurred during the ordinary course of business. This doesn’t apply in cases of dishonesty or fraud.
It remains to be seen whether the extension of the measures will simply shift the anticipated spike in insolvencies to 2021, or whether it will afford business enough time to trade out of insolvency. In any case, businesses shouldn’t become complacent. While the temporary changes will provide some relief, businesses should be focussed on how they can repay debts and have their ducks in a row by 2021 if they want to avoid going down the insolvency proceedings path.
About Rolf Howard
Rolf is Managing Partner of Owen Hodge Lawyers. He has been in the legal practice since 1986 and a partner of Owen Hodge Lawyers since 1992. Rolf focuses on assisting clients to proactively manage legal responsibilities and opportunities to achieve competitive advantage. Rolf concentrates on business planning and formation, directors’ duties, corporate governance, fundraising and business succession. His major interest is to assist business owners and their financial advisers plan and implement strategies to build and exit from successful businesses.