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COVID-19: Temporary amendments to insolvency laws extended to 31 December 2020

COVID-19: Temporary Amendments to Insolvency Laws Extended to 31 December 2020

On 7 September 2020, the Government announced an extension to the temporary debt relief measures to the creditors’ statutory demand and insolvent trading laws to 31 December 2020. These come as a further allowance upon the original measures, introduced on 25 March 2020.

The initial measures introduced a six-month temporary debt protection measure which became available for those experiencing financial difficulty as a result of COVID-19 economic pressures. The debt protection applied to individuals and businesses, which prevented unsecured creditors from taking recovery action from 21 days to six months. This was expiring on 24 September 2020. The 7 September announcement extended these protections until 31 December 2020.

The changes introduced section 5888GAAA of the Corporations Act 2001 (Cth) (‘the Act’), as a defence to section 588G of the Act, which states that directors have a personal duty to prevent insolvent trading of a company. This applies where the company is insolvent, becomes insolvent during the incurrence of the debt, or whether they have reasonable grounds to believe that the company may be insolvent or will become so.

For the requirements of the new section to be met, the debts incurred must have been in the ordinary course of business during the COVID-19 safe harbour period. An example of the debts that would satisfy this requirement would be taking out a loan to purchase equipment such as gloves, masks, and protective glass screens for the purposes of employee and customer safety. It is important to note that the individual seeking to rely on this new provision bears the evidential burden, meaning that they have the onus to prove the requirements of the provision.

The Government emphasised that this new defence does not constitute a cessation of debt recovery for creditors and that debt recovery is still available through normal court processes.

The extension also applies to the statutory minimum threshold, which is the point where creditors can issue a statutory demand regarding a debt on a company under section 459E of the Act. This minimum is now $20,000, up from the original $2,000. Companies have six months to respond to these demands, which is up from 21 days prior to the March 2020 changes. Creditors also require a higher minimum ($20,000 up from $5,000) in order to start bankruptcy proceedings against a debtor. These changes were already present with the March amendments but have been extended until 31 December 2020.

While these changes provide businesses with necessary relief and support in light of the substantial financial pressures due to COVID-19, it does have a significant impact on the rights of creditors. Creditors are now required to have more debt to either lodge a statutory demand or to start bankruptcy proceedings against the company. This considerably narrows the range of creditors which are entitled to take action. Most impactful, however, is the time period changes. Creditors now have to wait six months for a response from the company regarding their demand, which means that these new changes somewhat shift the financial burdens from the company onto potential creditors. Small creditors (< $20,000) are at a particular risk with these extensions as they cannot satisfy the new minimum debt requirements in order to take action.

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This blog is merely general and non-specific information on the subject matter and is not and should not be considered or relied on as legal advice. Coutts is not responsible for any cost, expense, loss or liability whatsoever to this blog, including all or any reliance on this blog or use or application of this blog by you.

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