In a move aimed to lessen the economic impact on businesses and individuals caused by the Coronavirus pandemic, the Australian Government has introduced some changes to insolvency laws in Australia that apply to personal and corporate insolvency regimes.
This includes a temporary increase to the threshold in which creditors can issue a statutory demand on a company (or bankruptcy notice on an individual) as well as the time the individual or company has to respond to a demand. It also includes temporary relief for directors from any personal liability for trading while insolvent, and providing temporary flexibility in the Corporations Act (Cth) 2001 and Bankruptcy Act 1966 (Cth) and relief from provisions in the Acts.
Insolvency Thresholds and Time to Comply
The minimum amount of the debt required before you can issue a bankruptcy notice or statutory demand has been increased, as follows:
| Previous threshold | New threshold | |
| Statutory Demand (Company) | $2,000 | $20,000 |
| Bankruptcy Notice (Individual) | $5,000 | $20,000 |
The time to comply with a bankruptcy notice and statutory demand has also increased, as follows:
| Previous Time to Comply | New Time to Comply | |
| Statutory Demand (Company) | 21 days | 6 months |
| Bankruptcy Notice (Individual) | 21 days | 6 months |
The above changes will apply for 6 months and are designed to give a debtor more time to consider repayment arrangements before they could be forced into bankruptcy or insolvency.
Further, when a debtor declares an intention to enter voluntary bankruptcy by making a declaration of intention to present a debtor’s petition, there is a period of protection when unsecured creditors cannot take further action to recover debts. This period is being temporarily extended from 21 days to 6 months.
However, this does not limit creditors from enforcing the debt against companies or individuals through the Courts.
Relief from Directors’ Personal Liability for trading while Insolvent
Directors of companies have a duty to avoid insolvent trading, otherwise, they can be personally liable for the debts incurred while the company was insolvent. As a result of the current Coronavirus crisis and the effect on the economy which is already been felt, this can result in boards of directors feeling pressured to make quick decisions to enter into an insolvency process if there is any risk that the company will be trading while insolvent.
However, to give companies the confidence to continue to trade through the Coronavirus crisis, directors will be temporarily relieved from their duty to prevent insolvent trading with respect to any debts incurred in the ordinary course of the company’s business. This will relieve the directors of personal liability that would otherwise be associated with insolvent trading and will apply for 6 months.
The temporary relief will apply to debts incurred in the ordinary course of the company’s business, and will not protect cases of dishonesty and fraud that will still be subject to criminal penalties. Debts incurred by the company will still be payable by the company.
New Powers for the Treasurer
In light of the uncertainty caused during these unprecedented times, the Treasurer will be given temporary instrument making power in the Corporations Act to temporarily amend provisions of the Act to provide relief from specific obligations or modify obligations to enable compliance with legal requirements during the crisis. This power will apply for 6 months, and any power made under this instrument will apply for up to 6 months from the date it is made.
Given the speed at which the coronavirus has been spreading and the vast changes with life as we know it, it is important for people and businesses to keep up to date with the new changes that the Australian Government has been implementing to combat the economic effects of the virus.
For more information, or for any legal assistance during the current coronavirus crisis, contact us on 9299 4912.