Home » Changes to Insolvency Laws give relief for debts but at what cost?

Changes to Insolvency Laws give relief for debts but at what cost?

Posted by Deepesh Daya | 26 March 2020 | Corporate & Commercial

On Sunday, 22 March 2020, the Federal Government announced that the Treasurer has been granted temporary powers to make regulatory changes to assist businesses in the context of the COVID-19 crisis, including powers to make regulatory changes to the Corporations Act and the Bankruptcy Act.

The aim is to give temporary relief to businesses and individuals experiencing financial distress, presumably for the period it is anticipated it will take for the economic impacts of the pandemic to resolve. The changes include:

  • an increase in the threshold to issue a Creditors Statutory Demand under the Corporations Act 2001 (Cth); and
  • relief for director’s personal liability when trading insolvently and an extension to Bankruptcy Notices.

CREDITORS STATUTORY DEMANDS

The threshold to issue winding up proceedings has increased significantly, with the minimum amount which can be subject to a Statutory Demand increasing from $2,000.00 to $20,000.00.  This is a significant jump for small businesses.

Prior to these amendments a company was presumed to be insolvent if they failed to respond to a creditors statutory demand within 21 days. Following the temporary changes, companies will now have 6 months to respond to such a demand.

BANKRUPCY NOTICES

Similar changes have been made in the case of individuals under the Bankruptcy Act 1966 (Cth) where the minimum debt has increased from $5,000.00 to $20,000.00 and an allowance of 6 months (increased from 21 days) to respond to a bankruptcy notice.

PRACTICAL IMPLICATIONS

Whilst this assists some businesses, it seems to increase the risk further exacerbating trade credit problems as debts become larger and less easy to enforce in a timely way. This seems counterproductive and may mean that more business and individuals experience cashflow problems as slow or non-payment becomes more frequent as a result of these changes.

In an economy where the Government has restricted trade of small business so drastically, these regulatory changes may not have the desired effect. It is also possible that some people may seek to use these shields as a weapon.

In our view these changes are ill considered and may cause more harm than good.

Don’t hesitate to contact the team on +61 2 4961 0002 or directly as outlined below:

Deepesh Daya dd@nexuslawyers.com.au

Marcus McCarthy mwm@nexuslawyers.com.au

Nicholas Achurch nra@nexuslawyers.com.au

Information sourced from: https://www.business.gov.au/risk-management/emergency-management/coronavirus-information-and-support-for-business/temporary-relief-for-financially-distressed-businesses

This publication is © Nexus Law Group and is for general guidance only. Legal advice should be sought before taking action in relation to any specific issues.+

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