The insolvent trading relief that was announced by the Federal Government in March this year has been extended until 31 December 2020. The temporary changes which were due to end on 30 September 2020 aim to help financially distressed businesses to manage the economic hardships experienced as a consequence of COVID-19 pandemic. The key noteworthy changes that will remain on foot are:
- Statutory demands issued from 25 March 2020 onwards must be for more than AUD $20,000 (an increase from the previous threshold AUD $2,000);
- Statutory demands must allow a minimum of 6 months for the debt to be paid or compromised or for an application to have it set it aside (an increase from the previous 21 days);
- Bankruptcy notices issued from 25 March 2020 onwards must be for more than AUD $20,000 (an increase from the previous threshold AUD $5,000);
- Bankruptcy notices must allow a minimum of 6 months for the debt to be paid or compromised or for an application to have it set aside (an increase from the previous 21 days); and
- Directors receive temporary relief from personal liability for insolvent trading liability.
Industry experts have expressed concerns, however, of potential adverse legal and economic impacts as a consequence of the relaxation of insolvency laws. Some say the Government’s regulatory changes are a short-term fix to a long-term problem and that the extended relief may ultimately result in greater levels of outstanding debt. Companies that are no longer trading and would normally have gone into administration, are continuing to operate in circumstances where the pre-COVID insolvency regime would likely have resulted in the appointment of an administrator. These companies are colloquially known as ‘Zombie Companies’ and companies like these potentially risk negatively affecting otherwise other companies in the supply chain.
Winding up in insolvency is not necessarily a fait accompli for companies suffering from an ability to pay their debts as and when they fall due, as the voluntary administration has a vital role in rehabilitating and restructuring businesses.
There have been various suggestions to the current changes that have been enforced. These include suggestions to adjust the thresholds to debts, the time given to creditors to respond to demands and suggestions to adjust the insolvency process to allow small businesses to make arrangements with creditors rather than directly entering into voluntary administration or liquidation.
Much like the curve of new coronavirus cases, adequate changes need to be made in order to flatten the curve of new insolvent companies. Banks are preparing for the influx of insolvent companies in 2021 once the temporary changes are understood to come to an end.