Insolvency relief extended until 2021

On 6 September 2020, the Federal Government announced its intention to extend the insolvency relief measures put in place in March 2020 as part of its response to the COVID-19 pandemic. The relief measures were due to expire in September 2020, but will now expire on 31 December 2020.

The Treasurer announced that the regulations, which have not yet been released, will be made to extend the temporary increase in the threshold at which creditors can issue a statutory demand on a company and the time companies have to respond to statutory demands that they receive. These changes will also extend the temporary relief for directors from personal liability for trading whilst insolvent.

These temporary relief measures include:

Bankruptcy proceedings

  • The minimum amount of debt required for a creditor to seek the issue of a bankruptcy notice against a debtor is increased from $5,000.00 to $20,000.00.
  • The time-frame for a debtor to respond to a bankruptcy notice is increased from 21 days to six months.

Statutory demands

  • The minimum threshold for creditors to issue a statutory demand on a company is increased from $2,000.00 to $20,000.00.
  • The time-frame for a company to respond to a statutory demand is increased from 21 days to six months.

Safe harbour from insolvent trading

  • Directors are relieved of their duty to prevent insolvent trading with respect to debts incurred in the ordinary course of the company’s business during the period in which the interim relief measures are in effect. Of course, these measures do not relieve the company from the obligation to repay debts incurred during this period.
  • Directors are reminded that the temporary safe harbour measures do not apply to breaches of the criminal prohibition in s 588G(3) on dishonest instances of insolvent trading.
  • Directors should also note that the relief does not extend to statutory or common law directors’ duties, such as the duty to act with due care and skill in good faith in the company’s best interest and for a proper purpose.

Federal Treasurer Josh Frydenberg has described the measures as a ‘regulatory shield’, with the extension of the temporary relief measures designed to prevent a further tranche of failures before businesses have had the opportunity to recover from the effects of the pandemic.

While the extension of these measures does provide continuing relief for struggling businesses, and perhaps incentive for investment, we expect to see increased demand for insolvency processes once the relief measures and stimulus cease.

Separately, the Federal Government has also announced significant proposed reforms to corporate insolvency laws for smaller businesses (in this case, businesses with liabilities of less than $1 million). The reforms include a new “formal debt restructuring process” which would enable eligible businesses to restructure and undertake workouts when in financial distress, with the guidance of specialist restructuring practitioners. These measures could take effect as early as 1 January 2021, providing a “softer landing” for eligible businesses who have been relying on the temporary COVID-19 relief measures.

This article is part of the October 2020 Equity Capital Markets Bulletin, click here to download.

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