Extension of temporary changes to insolvency laws to 31 December 2020

  • TurkAlert
  • Published 07.09.2020

Key Takeaways

The Federal Government has today announced that the temporary changes introduced in March to Australia’s insolvency laws as a response to the impacts of COVID-19 will be extended until 31 December 2020.  

Criticised by some as not doing enough to assist creditors seeking repayment of outstanding debts, these temporary changes seem to have been effective in slowing insolvencies to date. However, the changes could have the effect of ‘kicking the can down the road’ and increasing the looming avalanche of insolvencies expected in 2021.

We are yet to see if this is true, but in the meantime there are things that Creditors and Directors can do to improve their situation. 

Legislation

The announcement means we will see an extension to the ‘statutory minimum’ and ‘statutory period’ in the Bankruptcy Regulations 1996 (Cth) and the Corporations Regulations 2001 (Cth) as well as the temporary safe harbour introduced by s588GAAA of the Corporations Act 2001 (Cth). The changes were initially implemented in the Coronavirus Economic Response Package Omnibus Act 2020 and came into effect on 24 March 2020. 

These regulations state that:

  • Creditors remain unable to issue bankruptcy notices or statutory demands for payment for debts under $20,000.00.
  • Debtors who are served with bankruptcy notices or statutory demands issued prior to 31 December 2020 continue to have six months to comply with the requirements of the notice or demand.
  • Company directors continue to receive temporary relief from the duty to prevent insolvent trading in circumstances where the debt is incurred in the ordinary course of the company’s business.

The regulations were slated to be repealed at the end of September 2020, however will now be extended until at least 31 December 2020, a further three months.

Implications

Creditors whose strategy for recovering debts had been to refrain from issuing bankruptcy notices or statutory demands until the changes were repealed at the end of September, will need to consider if they are content to wait until 2021 to issue bankruptcy notices or statutory demands. Creditors may wish to consider some alternative methods of enforcement that remain available. Enforcement mechanisms through the courts, such as writs and attachment of debts or earnings remain available to creditors and could provide more immediate relief.

Unfair preference laws have not been amended and creditors receiving payments from companies that they suspect of being insolvent are at risk and may wish to consider cash on delivery terms or seek additional security, such as a charge or additional guarantees.

While directors continue to have a temporary safe harbour for debts incurred in the ordinary course of business, they should be proactive and seek to negotiate with creditors now so they are not faced with immediate pressure when the temporary measures cease. Directors are still required to be mindful that debts not incurred in the usual course of business are not covered by the protections and should seek legal advice if they are considering incurring a debt that is outside the usual course of the company’s operations.

Allan Kawalsky

Partner

P: 03 8600 5022

Email Allan