COVID-19 ALERT – Changes To Insolvent Trading Law

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There have been further developments in the everchanging list of COVID-19 measures being implemented by the government that you may need to be aware of if you are a business owner or a director.

On Sunday, Treasurer Josh Frydenburg announced that the government will place a suspension on insolvent trading laws to help businesses manage the economic effects of COVID-19. The purpose of these changes is to ease the pressure on businesses from action that could force them into insolvency by providing a safety net to hopefully allow them to resume normal operations once the crisis has passed.

The measures aim to minimise the impact of the high volume of insolvencies that are likely to occur during the COVID-19 pandemic. If your business is struggling at the moment, as so many are, these measures will provide some relief for the short term. However, if your business is currently owed money this may have the reverse effect on you as it may restrict your ability to take action to recover those debts.

The package currently applies specifically to statutory demands and wind-up/bankruptcy proceedings. At present, there have been no changes announced which would impact on letters of demand, statements of claim or other debt enforcement actions (i.e. garnishee orders and writs) as the measures specifically relate to insolvency, not general debt recovery.

Although it appears that normal debt recovery proceedings and actions will continue as normal, if you are currently pursuing debt recovery then your enforcement options may be affected by these changes if insolvency proceedings are an option for you to recover the debt. Likewise, if debt recovery measures have been taken against you then these changes will provide you with some relief to limit what actions your creditors can take against you.

The key changes to come out of this announcement are that there will be temporary increases to the thresholds for issuing statutory demands and commencing proceedings, as well as a longer period of time for companies to respond to statutory demands, summarised as follows:

  • threshold at which a creditor can issue a statutory demand to be increased from $2,000 to $20,000 for the next 6 months;
  • threshold for the minimum amount of debt required for a creditor to initiate bankruptcy proceedings to be increased from $5,000 to $20,000 for the next 6 months; and
  • time period for companies to respond to statutory demands to be increased from 21 days to 6 months.

There will also be relief for directors from personal liability when a company is trading while insolvent over the next 6 months. This means that directors will be temporarily relieved of their duty to prevent insolvent trading for any debts incurred in the ordinary course of the company’s business during this period.

From a taxation perspective, if you are an owner or director of a business that is currently struggling and you have concerns about the business’ tax liabilities, you can also contact the ATO to discuss your options for temporary reductions of payments or deferrals, or withholding of enforcement actions.

The government has issued a Fact Sheet about these changes, if you would like more information about these changes you can access the Fact Sheet HERE

As always, the team at Osborn Law are available to discuss any concerns that you may have and to answer any questions about these changes.

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