COVID-19 – Relief for Distressed Businesses

The Australian Government has announced temporary relief for businesses suffering financial distress by:

  • Giving protection to directors from insolvent trading;
  • Increasing the statutory minimum for the issue of a statutory demand and bankruptcy notice to $20,000; and
  • Extending the timeframe to comply with a statutory demand or bankruptcy notice from 21 days to 6 months.

These temporary changes were due to expire on 25 September 2020. However, on 7 September 2020, the Government announced that this period will be extended to 31 December 2020.

Protection from Insolvent Trading

Section 588G of the Corporations Act 2001 (Cth) imposes an obligation on directors to prevent a company from trading while insolvent. If a director causes a company to trade while insolvent, the director may be personally liable to pay the debt incurred.

To encourage directors to trade through the financial uncertainty of COVID-19, the Australian Government has agreed to remove personal liability for directors for debts incurred by a company in the ordinary course of business, after 25 September 2020 and until 31 December 2020 (s 588GAAA of the Corporations Act 2001 (Cth)).

This relief is in addition to the Safe Harbour Provisions implemented in 2017 (s588GA).

Statutory Demands and Bankruptcy Notices

A common way that companies end up in liquidation and individuals become bankrupt, are due to their failings to comply with statutory demands or bankruptcy notices, respectively.

The Government has introduced temporary legislation to curtail winding ups and bankruptcies during these extraordinary times. In summary, the temporary measures:

  1. Increasing the minimum threshold of a bankruptcy notice from $5,000 to $20,000;
  2. Increasing the minimum threshold of a statutory demand from $2,000 to $20,000;
  3. Allow debtors a respite to make payment; of rather than 21 days, up until 31 December 2020.

These changes will only apply to bankruptcy notice applications filed after 24 March 2020.

The summary above should not be considered a substitute for advice. Statutory demands and bankruptcy notices should not be ignored during these times of temporary relief. Businesses need to be proactive during these challenging times.

If your business is experiencing financial hardship speak to a member of the BTLawyers Commercial Litigation/Insolvency Team.