Blog

COVID-19 and insolvency – temporary relief

Gene Schirripa

31 Mar 2020

Topics

  • Business Law
  • COVID-19

The onset of the COVID-19 pandemic clearly brings many challenges for business. As part of its response, the Australian Government has announced a relief package for financially distressed businesses. This package provides some protection for businesses and their owners by putting in place more barriers to a business being placed into liquidation or made bankrupt. In this article Gene Schirripa outlines the package and its expect impact on businesses.

The package

The relief package includes the following for the next six months:

Higher thresholds for creditors

A statutory demand is a formal demand (in prescribed form) made pursuant to the Corporations Act 2001 (Cth) that is served on a debtor company, outlining the amount owed. If a debtor company fails to comply, an application can be made to wind up that company on the basis it is presumed to be insolvent (cannot pay its debts). Currently, creditors can serve a statutory demand on debtor companies if the amount owing to them is greater than $2000. Debtor companies have 21 days to comply or respond.

However, the changes introduced this week will give companies some breathing space by increasing both the threshold amount and the applicable time limits:

That threshold has been increased significantly, with creditor companies know only able to serve a statutory demand on a debtor if the amount owing is greater than $20,000.

Debtor companies now have six months to comply or respond.

Bankruptcy

A number of amendments will be made to the Bankruptcy Act 1966, the result of which will be an increase in the threshold for initiating bankruptcy proceedings against an individual from $5000 to $20,000. Once again, the time for response has been increased, from 21 days to six months.

Directors liability

Directors can personally liable under the Corporations Act 2001 if they breach their director’s duties under the Act, one of which is allowing their company to trade while insolvent. There are a number of criteria against which a company is assessed to determine whether it is insolvent, but some include continuing losses, overdue taxes and an inability to borrow funds. However, directors will be temporarily relieved of their duty to prevent insolvent trading with respect to any debts incurred in the ordinary course of the company’s business.

Impact

These measures will alleviate pressure on companies and their directors in the coming months as the full effects of the pandemic are felt in all facets of society. The six-month program is consistent with the general government rhetoric regarding the impacts of the pandemic (that is, the full effects of the virus will be felt for six months). Whether further measures are required will depend upon how the situation plays out, but the measures are a step in the right direction. The government may need to either increased the thresholds or temporarily freeze insolvency action if business is brought to a standstill because of further increased lockdown measures.

How can we help?

If you are the director of a company and require advice about the government relief package or general business advice in these uncertain times, please contact the Business Services team at Snedden Hall & Gallop on 02 6285 8000 or by email.

*The content of this article is provided for information purposes only, and we do not accept any liability for reliance upon the information contained in this article.  This information cannot be relied upon as legal advice.