Temporary changes to insolvency laws to provide businesses with added protections following the outbreak of Covid-19 were due to expire on 25 September 2020, but have now been officially extended until 31 December 2020.
The Corporations and Bankruptcy Legislation Amendment (Extending Temporary Relief for Financially Distressed Businesses and Individuals) Regulations 2020 have come into force on 22 September 2020 to extend these temporary measures.
Interestingly, these temporary measures initially introduced for 6-months on 24 March have been extended, despite a growing resistance from the business community that it is just delaying the inevitable and resulting in significant uncertainty for creditors.
In explaining the rationale behind the extension, the Federal Government states:
The extension of these measures will lessen the threat of actions that could unnecessarily push business into insolvency and external administration at a time when they continue to be impacted by health restrictions.
These changes will help to prevent a further wave of failures before business have had the opportunity to recover.
By way of summary, the temporary measures include the following:
- Increasing the monetary threshold in which creditors can issue a statutory demand to a company (being increased from $2,000 to $20,000).
- Increasing the time for compliance to a statutory demand by companies (from 21 days to 6 months).
Bankruptcy notice/ debtor's petition
- Increasing the threshold for a bankruptcy notice to be issued by the Official Receiver against individual debtors (from $5,000 to $20,000).
- Increasing the time period for individual debtors to respond to a bankruptcy notice (from 21 days to 6 months).
- Extending the period of protection for individual debtors after a declaration of intention has been made to present a debtor's petition (from 21 days to 6 months).
- Providing a special safe harbour provision to relieve company directors from any personal liability for insolvent trading during this period (in relation to debts incurred in the "ordinary course of the company's business").
The above temporary measures are likely to allow individuals and businesses more time to recover and restructure their operations with the aim of returning to financial viability.
It is worth noting, though, that the true effect of these measures remains to be seen and may not become apparent until after the grace period of the Act draws to a close on 31 December 2020. Some of the possible risks on the horizon include:
- An increase in the risks associated with providing credit due to the difficulties of enforcement in the event of a default.
- An increased likelihood of companies to trade whilst insolvent.
- Reallocation of the liquidity pressure and risk from debtors to suppliers and creditors.
- Sharp increase of creditors petitions and winding up proceedings filed shortly after 31 December 2020 after the temporary measures come to an end.
Covid-19 has posed unique economic challenges to businesses and individuals, and the success of the temporary measures will depend on whether they are in fact able to provide much needed help as we navigate our way out of this pandemic.
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