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The effects of the COVID-19 pandemic have no doubt changed the outlook for many businesses, no matter their size or industry.
Understandably, these sudden changes have raised the issue of whether businesses have enough cash flow to continue trading in this uncertain time.
In response, in March 2020, the Coronavirus Economic Response Package Omnibus Bill 2020 came into effect, which made a few temporary changes to the Corporations Act 2001 and the Bankruptcy Act 1966.
Believe it or not, these temporary changes to the law may keep businesses trading even when being deemed insolvent or becoming bankrupt is a very real possibility.
So, what do these changes mean for businesses across Australia? In this article, we’ll break it all down for you.
What’s The Difference Between Insolvency And Bankruptcy?
Before we dive into the new changes to Australia’s insolvency and bankruptcy laws, it’s important to understand the difference between these two concepts and what they mean for businesses across the country.
Insolvency is an umbrella term that refers to the legal state in which someone is unable to pay their debts when they’re due.
Bankruptcy is the legal process where individuals are no longer able to pay off their debts. When an individual declares bankruptcy, they’re released from their obligations to pay off those debts (but this can still lead to some serious future financial consequences).
In the business world, bankruptcy is the process for personal insolvency which really only applies to sole traders who have their own Australian Business Number (ABN).
If you’ve registered as a company, insolvency is a little more complex and bankruptcy isn’t really an option. Instead, the Corporations Act sets out processes for how companies need to act when they are no longer able to pay off their debts.
Changes To Creditors’ Statutory Demands
The first (and probably most important) change that has been made to insolvency laws is increasing the threshold for issuing a statutory demand for companies.
Before the new laws were made, creditors were able to serve a statutory demand on a debtor company if that company owed a liquidated debt of at least $2,000. Previously, the debtor would then have 21 days to pay that debt. And, if still unpaid within 21 days, that company would then be deemed insolvent under the Corporations Act. The creditor would then be able to make an application to wind up the company to be deemed insolvent.
From 25 March 2020, under the temporary changes to the law, the debt threshold has been raised. Now, creditors can now only serve a statutory demand on a debtor company if it owes a liquidated debt of at least $20,000.
On top of this, the 21 day period to pay the debt off has now been increased to a 6 month period.
Changes To Bankruptcy Laws
Remember that bankruptcy really only applies to individuals, such as sole traders.
Before the new laws were passed, creditors could send a bankruptcy notice against an individual (or sole trader) if they owed a debt of at least $5,000. Similar to statutory demands, individual debtors had 21 days to respond to a bankruptcy notice. During this time, individual debtors facing insolvency could voluntarily apply for bankruptcy, and creditors generally wouldn’t be able to take any further action for 21 days afterward.
As of 25 March 2020, the debt threshold has been raised to $20,000. Additionally, debtors now have up to 6 months to respond to a bankruptcy notice (rather than the original 21 days). And, if an individual debtor were to voluntarily apply for bankruptcy, unsecured creditors cannot take further action against them for 6 months afterward, rather than 21 days.
Protection From Directors’ Personal Liability For Insolvent Trading
Under the Corporations Act, company directors have a duty to prevent insolvent trading by their company.
Before changes were made to the law, company directors would be personally liable for insolvent trading if the company incurred a debt while it was insolvent, or was made insolvent by incurring that debt.
In addition, the director would be personally liable even if they had reasonable grounds to believe that the company was insolvent when trading during that time, or would become insolvent by incurring that debt.
Under the recent changes to the law, directors are now temporarily relieved from this duty.
However, just take note: despite this temporary relief being granted to company directors, they may still face criminal penalties if debts are incurred dishonestly or fraudulently during the 6 month period from 25 March 2020.
Where To Next?
With COVID-19 changing the business landscape in Australia rapidly, businesses need to make decisions fairly quickly to respond to different stakeholders.
Currently, the Australian Securities and Investment Commission (ASIC) is the primary regulator of the Corporations Act and makes decisions against businesses who breach the Corporations Act. Sometimes, the decision may be to not take any enforcement action at all.
However, this is generally a lengthy process. For instance, a company has to actually request a decision by ASIC, which may take quite some time. In the face of COVID-19, where there are time and cost pressures at play, this is creating a certain level of uncertainty for businesses. This uncertainty may be heightened during this time of economic downturn, particularly if the company already has substantial debts to pay off.
Key Takeaways
These temporary changes to the law aim to give individuals and businesses the opportunity to continue operating during the COVID19 pandemic, and to be in the best position possible to return to financial viability once the pandemic is over.
While none of the changes affect creditors’ abilities to enforce their debts, one of the likely outcomes of these temporary changes will be a reduction in the use of creditor’s statutory demands and bankruptcy notices as debt recovery mechanisms for the 6 month period starting March 25, 2020.
Need Help Understanding Where You Stand?
If you’re struggling to interpret these new laws, we can help you understand what they mean for your business.
Or if your business needs legal help navigating COVID-19, head over to our free resources page for useful information to help you get through this time. We’re updating this page as frequently as we can to help you stay on top of all the new changes!
At Sprintlaw, our helpful team is happy to assist your business — from commercial leases to making decisions with your employees and strengthening your contracts against COVID-19 risks. You can reach out to us on 1800 730 617 or at team@sprintlaw.com.au.
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