Given the impact of COVID-19 on the economy, the casualties will inevitably include businesses as well as individuals. We have all heard of businesses citing COVID-19 as the cause of, or contributing to, their insolvency. On 22 March 2020 the Federal Government announced a number of changes to insolvency laws to provide relief for businesses and to cushion the economic impact of COVID-19.
Temporary Changes to Insolvency Laws: What You Need to Know
Given the impact of COVID-19 on the economy, the casualties will inevitably include businesses as well as individuals. We have all heard of businesses citing COVID-19 as the cause of, or contributing to, their insolvency.
Please find a summary of the changes outlined below:
- The threshold for a creditor issuing a statutory demand on a company has been temporarily increased from $2,000 to $20,000
- The period for a company to respond to a statutory demand will increase from 21 days to six (6) months
- Company directors are relieved from any personal liability for trading whilst insolvent – in relation to debts incurred in the ordinary course of business
- Any debts incurred by the company will still be payable by the company
These changes will be in effect for at least six months.
A number of other temporary changes have also been introduced, including similar increases in relation to bankruptcy laws for individuals. The Treasurer has also been provided with the power to make instruments under the Corporations Act to provide temporary targeted relief from specific obligations for companies.
We expect the Government will act urgently to bring these proposed changes into effect. It is not yet known whether the changes will be applied retrospectively.
Impact of the changes
These amendments are good news for businesses in the current COVID-19 environment. They are designed to lessen the threat of actions that could unnecessarily push otherwise profitable and viable businesses into insolvency during this temporary period.
Until the changes are brought into effect, the “safe harbour” laws may assist directors of companies suffering financial hardship if the requirements are met.
Please click here if you would like a complimentary copy of our Safe Harbour Guide.
And what about suppliers?
For businesses that supply on credit terms, there is likely to be a tightening of credit.
Even without these amendments, in the current economic environment there is a risk that the business you have contracted to supply goods or services to, may be in financial difficulty. With these amendments, there is a further risk that the business you are supplying to may already be trading whilst insolvent.
Whilst the amendments are important for businesses to be able to carry on business during this period, suppliers do need to be conscious about protecting their own interests.
The proposed amendments will increase the risk of a company purchasing goods and services without being in a financial position to pay for those goods and services, thereby putting the supplier at increased risk of financial difficulties.
As such, suppliers ought to act now to review their existing contracts and terms of trade. Options for suppliers to address these risks might include:
- Tightening terms of credit
- Reviewing your deposit requirements and payment terms
- Ensuring that your contracts or terms and conditions provide for adequate security
- Registering all security interests, even if you do not intend to commence recovery action at this stage, to ensure priority over other interests where possible
Bottom line
These amendments are good news for businesses in the current COVID-19 environment. They are designed to lessen the threat of actions that could unnecessarily push otherwise profitable and viable businesses into insolvency during this temporary period.
Whilst the amendments are important for businesses to be able to carry on business during this period, suppliers do need to be conscious about protecting their own interests to reduce flow on effects and financial risks.
It is expected that further measures will be introduced over the coming days and weeks, and we will keep you informed of those changes as they arise.
Insolvency Lawyers for Sydney and Newcastle
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The information in this article is not legal advice and is intended to provide commentary and general information only. It should not be relied upon or used as a definitive or complete statement of the relevant law. You should obtain formal legal advice specific to your particular circumstance. Liability limited by a scheme approved under Professional Standards Legislation.
