COVID-19 has been a very difficult time to keep many businesses afloat. If you are currently running a business, you have likely had to quickly adapt to maintain your cash flow. To assist businesses throughout this time, the Federal Government introduced changes to insolvency laws as of 25 March 2020, for a six month period. However, this period may be extended. The Government made these changes to offer temporary relief to directors of companies. This article will explain what those changes are and how they may affect your business.
Changes to Insolvency Laws Summary
- personal liability of directors for any company debts which are acquired while the company is insolvent has been suspended for six months from 25 March 2020;
- only individuals with eligible debts over $20,000 (up from $5,000) will receive bankruptcy notices. They will have six months to comply with the notice; and
- only companies with debts over $20,000 (up from $2,000) will receive statutory demands. They will have six months to comply with the statutory demand.
Personal Liability of Directors
Directors of companies have a statutory duty to not trade while insolvent. Insolvency essentially means you do not have the cash flow to pay your debts when they are due.
Before these protections, if a business was trading while insolvent, the director would be held personally liable for the insolvent trading and the debts their company incurs while insolvent. A director does not need to have direct knowledge that the company is insolvent at the time. It is enough to say that there were reasonable grounds that they knew that the company was insolvent or would potentially be insolvent by incurring further debts.
In acknowledgement of the unknown circumstances due to the COVID-19, directors are now temporarily relieved from the duty to not trade while insolvent. It should be noted that, while directors are being temporarily relieved from their duties and will not be held personally liable, the company will continue to remain liable for the debts incurred.
Debt that has been incurred fraudulently or dishonestly during the six months will still be open for criminal prosecution and is not included in the temporary suspension.
Statutory Demand Changes
Statutory demands are an effective debt recovery tool for a business as it can create a sense of urgency for a debtor to pay your debt. Before the changes, you could issue a statutory demand for debts that were $2,000 or over, and the debtor had 21 days to respond, or they would be presumed insolvent. Once you had issued the statutory demand, you could then make an application to wind up the company presumed insolvent. The recent changes to the laws have raised the threshold for issuing a statutory demand.
From 25 March 2020, a statutory demand can only be issued in relation to outstanding debts over $20,000. On top of this, the debtor has six months to comply with the statutory demand and repay the debt. This replaces the 21 day limit that was originally in place.
Bankruptcy Law Changes
If you are a business that operates as a sole trader, bankruptcy laws changes may be relevant to you.
Prior to the new legislation, if you were owed a debt by a sole trader of $5,000 or more, you could send them a bankruptcy notice. Similar to the statutory demand process, they would have 21 days to respond to the bankruptcy notice.
From 25 March 2020, a bankruptcy notice can only be issued in relation to outstanding debts over $20,000. In addition to this, the debtor has six months to respond to the bankruptcy notice. This is similar to the changes to statutory demands.
What Does This Mean for My Business?
These changes aim to reduce the financial pressure on businesses and individuals who have had to adapt to new restrictions. These changes also provide businesses with more breathing room to work out the next steps. If this is true of your business, the recent temporary changes to insolvency laws will be good news for you.
That being said, you must use this time to make a realistic assessment of your business and its future viability. If your business is struggling to stay solvent and repay ongoing debts, even with these temporary changes to insolvency laws, you may be considering voluntary administration as an option. If closing your business is inevitable, the sooner you do this, the better it will be for you and your business.
Collecting outstanding debts was already a difficult task prior to COVID-19, and it has just been made even more difficult. Further legal restrictions on debt recovery may also occur in the near future. If you are relying on repaying your outstanding debts, there are still ways to recover your debts legally. Here, you should expect it to take longer than usual.
The temporary changes to insolvency laws aim to assist businesses that are struggling due to the COVID-19. The change is only temporary, so you must make a realistic assessment of the viability of your business. It is always better to make these decisions earlier rather than later.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.