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COVID-19: Federal Government talks up insolvency lifeline

Yesterday, 22 March 2020, the Federal Government announced its intention to make temporary changes to insolvency laws and roll out further temporary relief for financially distressed businesses.

The changes are part of a raft of measures aimed at mitigating the adverse economic impact and expected difficulties with business and cashflow, as a consequence of the COVID-19 pandemic.

There is a lot of negative news circulating about the state of our economy and bleak outlook for many SMEs, so the announcement of a second stimulus package (now being called a ‘rescue package’) together with the proposed amendments to the Corporations Act will be a welcome addition to the first round of Federal and State stimulus packages announced over the last few weeks.

The changes to insolvency laws, which are expected to be in place for at least 6 months, include:

  • raising the minimum threshold debt amount from $2,000 to $20,000 for creditors to issue statutory demands to companies;

  • extending the time for companies to comply with statutory demands from 21 days to 6 months;

  • raising the minimum threshold debt amount from $5,000 to $20,000 for creditors to issue bankruptcy notices to individual debtors;

  • extending the time for compliance with bankruptcy notices from 21 days to 6 months; and

  • temporarily relieving directors from personal liability for trading whilst insolvent in relation to debts incurred in the ordinary course of business.

These changes do not signal a free pass to directors to engage in wilful misconduct. The Government has been clear that directors will still be personally liable for the debts incurred while a company is insolvent in egregious cases of dishonesty and that fraud will remain subject to criminal penalties.

These new thresholds and extended time periods will be implemented in the Coronavirus Economic Response Package Omnibus Act 2020 (Act) and will come into effect from the day after the commencement of the Act, which we expect will be passed by Parliament this week.

It is unclear how these changes will interact with the existing safe harbour regime (which is aimed at protecting directors from a claim for insolvent trading whilst exploring restructuring opportunities) and whether this regime will continue to be effective during this 6 month period.

In any event, the proposed amendments are welcome news for directors and may provide sufficient ‘breathing space’ to enable SMEs to trade out of the challenging economic headwinds.

For more information on the Federal Government’s economic stimulus for temporary relief for financially distressed businesses, read the fact sheet here.

If you are concerned about insolvent trading or would like to understand more about the proposed legislative changes, please contact us.

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