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Can I get paid now? The Pros and Cons of the proposed Insolvency Amendments in response to the COVID-19 Crisis

There is no question that this is an unprecedented time that the Australian economy is currently facing, with the ever looming lock-down of the country coupled with the implementation of closures to businesses as a direct result of the COVID-19 outbreak, many are now beginning to wonder how quickly they can recover debts, to ensure financial stability through the pandemic. Whilst there is no certainty as to the sustainability of the economy, and a particular lack of appetite for litigation given the current climate – business and individuals must be vigilant and frugal as to their proposed spending and collection of outstanding debts, in order to safeguard their financial position as well as to ensure that they are prepared for any interruption to their financial stability.

In order to combat what would seem to be a quick snatch and grab at debts, the Federal Government has announced as part of its stimulus package, that it proposes to make temporary changes to Australia’s insolvency laws to seek to combat and/or alleviate the impact the COVID-19 outbreak continues to have on individuals, businesses and significantly, the economy.

At a snapshot, some of those proposed changes by the Coronavirus Economic Response Package Omnibus Bill 2020 include:

  • Amending the Corporations Act and the Bankruptcy Act to increase the threshold for a statutory demand and a bankruptcy notice from $2,000.00 and $5,000.00 to $20,000.00.  For debts below the threshold sum, you would have to consider suing in a court of competent jurisdiction (where no judgment has been obtained), or to have recourse to alternative enforcement remedies such as garnishees, writs of execution (depending upon the particular circumstances of the case)
  • Increasing the time for compliance with a bankruptcy notice and statutory demand, from twenty-one (21) days to six (6) months.
  • Relief from personal liability for directors trading while insolvent for a six (6) month period.

Whilst the amendments are well- intentioned, they pose some significant queries as to their potential application, notably:

  • Companies will be provided a six (6) month window to weather the storm and directors will be temporarily relieved for 6 months from personal liability for insolvent trading. The Treasurer has noted that egregious cases of dishonesty and fraud will remain subject to criminal penalties. It is also important to note that any debts incurred by a company remain payable and companies can be sued in a court, in the usual way. The measures may impact the safe harbour provisions, which are utilised to provide directors relief from personal insolvency and to allow businesses to trade out of insolvency.
  • Creditors are permitted under the respective acts to continue to enforce debts by issuing a statutory demand (corporation) and a bankruptcy notice (personal), subject to the above modifications. Should the debtor fail to comply with the demand they are presumed to be insolvent and the creditor has the ability to wind up or commence bankruptcy proceedings. The proposed changes will increase the time for compliance from twenty-one (21) days to six (6) months and increase the threshold from $2,000.00 (corporation) and $5,000.00 (personal), to $20,000.00. While this proposed amendment will attempt to alleviate pressure on some businesses, notably those in the hospitality and retail industries, it will no doubt have a significant impact on suppliers.
  • The increase from twenty-one (21) days to six (6) months will remove the sting in issuing demands by creditors against debtor companies. It would seem impracticable to issue demands against companies or individuals should the government extend the statutory time for compliance to 6 months, given that the substantial time which the government has proposed to allow a debtor to respond.
  • The amendments will only apply to demands issued after the enactment of the legislation. Essentially the act will not apply retrospectively and will not affect current demands which have been issued. 

The proposed changes, will no doubt, be welcomed by many debtors, although may cause strife for creditors in the recovery of debts. It is important that when considering either avenue, appropriate legal advice is obtained to ensure that unnecessary costs and expenses are not incurred as a result of the ever evolving pandemic, and the potential changes it may have both on the economy and from the legislature.  

Whilst the proposed changes are yet to come into effect, there is invariably no doubt that the Federal Government will begin implementation of safeguards within the legislature, to assist not only individuals and business throughout the crisis, but also to boost the economy during these difficult times.

The changes to the current regime will have a significant impact on both creditors and debtors and directors of companies that may be doing their best during this difficult time, although are invariably trading whilst insolvent. During this difficult period, it is important that the right advice is sought.

If you need assistance with your business recoveries we encourage individuals and businesses to reach out and contact our Commercial Litigation & Dispute Resolution team,  who will be able to assist with any advice, or further information as to the proposed amendments – and subject to their implementation, the new legislative regime.

We will continue to update our network as the proposed legislative amendments unfold.

Please click here to contact our Commercial Litigation & Dispute Resolution team.


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