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Temporary Insolvency Law Changes May Keep Businesses Afloat During the COVID-19 Pandemic

Temporary Insolvency Law Changes May Keep Businesses Afloat During the COVID-19 Pandemic

In response to the current Coronavirus pandemic and the impact that it has had on businesses, the Federal Government recently introduced temporary measures that will assist in relieving companies and their Directors in these times of financial difficulty. It is no secret that impending insolvency and/or bankruptcy is currently a very real risk for many Australian businesses and as any Director will know (or should know!) the implications of trading insolvent can be significant.

What is the Government’s Intention?

The intention of the relief being provided by the Government at this time is consistent with the overall theme of the relief being provided to all businesses and that is, to keep them trading while we all navigate these rapidly changing and challenging times by:

  1. helping them to stay solvent during the pandemic; and
  2. reducing the imminent threat of personal liability for Directors if a company does become insolvent as a result of the pandemic.

What Measures Have Been Introduced?

The relief measures that were passed by Parliament in late March will be in place for the next six months and include:

  1. an increase to the threshold amount and time to respond to statutory demands;
  2. an increase to the threshold amount and time to respond to bankruptcy notices against individuals; and
  3. a temporary ‘pause’ on Director’s personal liability for insolvent trading.

Both the threshold amounts for statutory demands and bankruptcy notices have been increased significantly, to $20,000, and the time to respond has been increased to six months. What this means is that the Government has recognized that companies and individuals alike may very well incur more debt while their businesses are affected during this time and will likely require more time to ‘get back on track’ and be in a position to pay their creditors. It seeks to ensure that companies and individuals are able to ‘stay afloat’ for as long as possible, rather than having to enter voluntary liquidation or declare bankruptcy.

These measures will no doubt provide some comfort for businesses who are concerned about outstanding debts owed to their creditors.

What About Personal Liability for Directors?

In the event that a company does find that the impacts of the pandemic have effected their business to a point where they are still struggling to pay their debts, the Directors of that company can rest assured that they may be relieved of any personal liability associated with insolvent trading that occurs over the next six months. It is extremely important for Directors to understand that this relief only applies to insolvent trading that has occurred during the ordinary course of the company’s business, it does not apply to cases of dishonesty or fraud (which will still be subject to criminal penalties). Directors must continue to ensure that they are still taking active steps to deal with financial stress and consider options for ‘staying afloat’, but are simply being given some breathing room to do so.

What Should Businesses Do Next?

Regardless of the relief being provided by the Government, it remains as important as ever for business owners to consider how they might diversify their businesses to keep income coming in and keep the debts owed to creditors down. For that reason, we encourage businesses to seek professional advice wherever they can these matters and how they might take advantage of the other forms of relief being provided by the Government. Every business’ situation will be different, especially given the current climate, and seeking assistance earlier rather than later could make all the difference to how a business comes out of this on the other side.

We Can Help!

As a small business our self, Enterprise Legal is extremely passionate about assisting businesses wherever we can in these difficult times and have already identified ways in which we can do so. To that end, we have prepared a number of free ‘Coronavirus Resources’ for businesses which are available via our website. 

Please do not hesitate to get in touch with us to chat about how your business has been effected by the pandemic and how we might be able to assist you to survive and thrive!

☎️ (07) 4646 2621

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