COVID-19: Temporary Changes to Australia’s Insolvency Laws
In order to help protect Australian businesses from insolvency due to the significant restrictions placed upon them in response to COVID-19, effective from 24 March 2020 is the Coronavirus Economic Response Package Omnibus Act 2020 (CERPO Act). The CERPO Act will be in effect for a six-month period starting on 25 March 2020.
The aim of the CERPO Act is to avoid unnecessary insolvencies and bankruptcies by providing increases to the thresholds bankruptcy notices and statutory demands can be issued for and by providing directors with temporary relief from personal liability for trading whilst insolvent.
Temporary Changes to Bankruptcy
- Debt threshold for creditors to apply for a bankruptcy notice against a debtor increased from $5,000 to $20,000
- Timeframe for a debtor to respond to a bankruptcy notice increased from 21 days to 6 months before a creditor can commence bankruptcy proceedings
Temporary Changes to Insolvency Laws
- Debt threshold for creditors to issue a statutory demand against a debtor increased from $2,000 to $20,000
- Timeframe for a debtor to respond to a statutory demand increased from 21 days to 6 months before a creditor can commence winding up proceedings
- Directors will have temporary relief from personal liability under the insolvent trading provisions for debts incurred in the ordinary course of business during the 6-month period that the CERPO Act is in effect. You can read more about these changes here.
What does this mean for debtors?
These changes mean that if individuals or companies owe less than $20,000 to an individual creditor that they can no longer have a bankruptcy notice or statutory demand issued upon them during this 6-month period. It also means that even if there is a debt owed in excess of $20,000 and they have a bankruptcy notice or statutory demand issued upon them, they now have 6 months before they must respond or have action commenced against them.
However, this does not mean that they should sit still during this period and not take action. We urge anyone that is having cash flow difficulties or debts that they are worried they may not be able to pay, to seek advice before these temporary changes end and creditors come knocking when it is too late to remedy the issues.
What does this mean for directors?
While it may appear that directors can avoid personal liability during this COVID-19 period, directors can be liable for claims for insolvent trading for debts incurred before 25 March 2020 and after the 6 month ‘grace’ period expires.
Despite the relaxation of the insolvent trading legislation, directors can still be held liable for other claims under the Corporations Act, such as:
- Claims against directors for breaching their general director duties to a company under sections 180, 181, or 182 of the Act; and
- Claims against directors and related parties in respect of unreasonable director-related transactions under section 588FDA of the Act;
For directors and companies where financial distress appears, professional advice from a registered insolvency practitioner should be sought. You should not feel afraid or embarrassed to seek help as this is path rarely trod for many. It may be that a plan can be put in place through a restructure process that takes advantage of the relief given without exposure to additional risks.