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COVID-19 – Changes to Australian Insolvency Laws

Laura Bazouni ||

The Australian Government has recently announced that it will make temporary changes to the insolvency and corporations’ legislation in light of the COVID-19 pandemic. Both State and Federal lockdown policies will undoubtedly have an economic impact on many profitable and viable businesses. To reduce the financial stress, and to ensure businesses survive this pandemic, these measures will give businesses a safety net to enable them to continue trading and manage their cash flow during the current period of uncertainty as opposed to facing insolvency and mandatory closure.

The temporary changes have legal effect from 25 March 2020 and we have outlined what the amendments are and how they may impact you and your business.

Insolvent trading:

  1. To empower businesses with the confidence to trade, directors will be removed from all personal liability for trading whilst insolvent in relation to debts incurred in the ordinary course of business.
  2. This measure does not extend to debts that are not incurred in the ordinary course of business and does not eradicate the liability of businesses to pay their debts.

Statutory demands:

  1. Issuing a statutory demand is the first step a creditor can take to wind up a company. Failure to comply with the statutory demand creates a presumption of insolvency which creditors can rely on to progress to the next stage of the process. A statutory demand can be issued by a creditor, if the company owes the creditor a debt greater than $2,000. The proposed amendments will increase the threshold of debt from $2,000 to $20,000;
  2. The time to comply with statutory demands will also be extended from 21 days to 6 months- this will give the company more breathing time to pay and eliminate the stress of facing wind up proceedings.

Bankruptcy:

  1. Individuals could be faced with bankruptcy proceedings if they owe a creditor a debt greater than $5,000. The proposed measures include increasing the threshold for a creditor to commence bankruptcy proceedings from $5,000 to $20,000.
  2. The time for an individual to respond to a bankruptcy notice will also be increased from 21 days to 6 months as well as the period of protection for a debtor once they make a declaration of intention to present a debtor’s petition from 21 days to 6 months;
  3. This will give individuals requisite time to consider and negotiate payment arrangements with their creditors before being forced into bankruptcy.

The amendments and measures are only temporary and will be in force for six (6) months, however, if the COVID-19 restrictions are still in place, then the time frame may be extended. Creditors can still enforce their debts against companies or individuals through the Courts to recover outstanding debts and consider alternative enforcement options which are not impacted by the amendments.

We will continue to monitor any further announcements made by the Federal Government, but if you require any assistance now, please do not hesitate to contact a lawyer in Coleman Greig’s Litigation and Dispute Resolution team.

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