An essential aspect of the Federal government’s response to the coronavirus (COVID-19) outbreak is a temporary relief package for financially distressed businesses. As we have looked into briefly in our previous articles, this economic response plan by the government aims to provide a safety net; granting businesses confidence and assurance throughout the pandemic and beyond. In this article we will explore the government’s new business insolvency rules and what they mean for you and your business.

The amendments to the Corporations Act 2001 (Cth) and the passage of the Coronavirus Economic Response Package Omnibus Act 2020 (Cth) have now made it more difficult to have a company or individual’s business deemed insolvent, for the six-month timeframe in which these newly implemented laws will perceivably apply.

The new insolvency rules primarily concern director and creditor reliefs, and are clearly outlined below.

Statutory Demands Against Companies

Creditors utilise statutory demands in order to action a company’s liquidation. Now, the minimum debt amount for issuing a statutory demand has now increased from $2,000 to $20,000 and the time threshold to either respond or pay, has extended from 21 days, to six months. This will allow greater leniency for companies and more flexibility should a company fall into debt or financial trouble.

Bankruptcy Notices Against Individuals

Individuals, such as sole traders, can soon become bankrupt when a creditor issues a bankruptcy notice. As with statutory demands, when the notice expires, a creditor can commence court proceedings against the individual to have them deemed bankrupt. The new insolvency and bankruptcy rules now mean that the threshold amount for the issuing of a bankruptcy notice is now $20,000, up from $5,000. The individual’s timeframe to pay or respond is also now six months.

Director’s Liability for Insolvent Trading

Ordinarily, if a company or business is trading whilst insolvent, there are severe penalties and director’s liability. Some of these penalties and the director’s personal liability have now however, been ‘paused’ in accordance with the new insolvency rules. Company directors now have their personal liability for insolvent trading waived for a period of six months if the insolvent trading occurs in the ‘ordinary course of the company’s business’. It is notable however, that fraudulent and dishonest practices will still hold criminal ramifications and penalties; the removal of director liability is purely for the purposes of assisting businesses to run smoothly.

Extension on Intending to Declare Bankruptcy

The Bankruptcy Act 1966 allows individuals to lodge a ‘declaration of intention’ to present a debtor’s petition with the Australian Financial Security Authority (AFSA); temporarily restraining creditors taking action to enforce insolvency. This measure has allowed individuals to come to arranged agreements with creditors and then if unsuccessful, to declare their bankruptcy. The period for this temporary restraint has now increased from 21 days to six months.

ATO Flexibility

The Federal Government and the Australian Taxation Office (ATO) are also working together with company directors and business owners to find practical solutions to the problem posed by coronavirus. These include temporary reduction of payments and deferrals as well as the withholding of specific enforcements such as Director Penalty Notices (DPNs).

Need Help?

During this time, it is important to seek legal advice specific to your situation. We, at The Quinn Group, can provide you with advice and information tailored to your business’ needs. You can contact our team of experienced commercial lawyers by clicking here to submit an online enquiry form or call us on 1300 QUINNS (1300 784 667) or on +61 2 9223 9166 to arrange a teleconference or appointment.