Update to Ending of COVID-19 Relief Measures
On 22 March 2020 the Government announced temporary insolvency relief for financially distressed companies, to help businesses get to the other side of the Coronavirus crisis.
The temporary insolvency relief increased the thresholds at which creditors could issue a statutory demand (or a bankruptcy notice) and the compliance time for debtors to respond to statutory demands and bankruptcy notices.
As a result of the temporary relief measures, creditor enforcement action (to recover debts) effectively graded to a halt. Businesses that would otherwise have failed (and entered External Administration) were kept alive through a combination of lack of creditor debt recovery action and other Government relief incentives. Such as JobKeeper – which was intended to give temporary support to viable businesses during a period of broader mandatory restrictions and shutdowns.
Consequently, the number of businesses entering External Administration (liquidation or voluntary administration) dropped over 50%. This compared to the same period last year and, in the September quarter 2020, bankruptcy numbers were at their lowest level since AFSA records began in 1986.
Temporary relief was also given to directors of companies from any personal liability for trading while insolvent, with respect to debts incurred by the company in the ordinary course of the company’s business. Provided that an external administrator was appointed to the company before the moratorium’s expiry, being before 31 December 2020.
The temporary insolvency relief measures expired on 31 December 2020 (while JobKeeper currently has a scheduled end date of 28 March 2021).
Insolvent trading moratorium ends
Many people appear to be operating under the misunderstanding that the insolvent trading moratorium (in effect during the March – December 2020 period) provides a complete shield from personal liability for insolvent trading. That is simply not the case.
Directors trading-on a business beyond 31 December 2020 will be exposed to the insolvent trading provisions of the Corporations Act 2001 throughout any period that the company was insolvent—including the March-December 2020 period—should the company later end up in liquidation.
Directors should be aware that they would only be afforded protection under the temporary relief measures IF they appointed an external administrator to the company before the moratorium’s expiry, i.e., before 31 December 2020.
For the avoidance of doubt, directors of companies who are still trading now that were trading insolvent during the March – December 2020 period, and that later end up in liquidation, will be exposed to personal liability for insolvent trading.
Where are we now?
On 1 January 2021 (following the expiration of the temporary insolvency relief measures) the Government’s insolvency reforms to support small businesses commenced.
The reforms introduce new insolvency processes suitable for small businesses aimed at reducing the complexity, time and costs required to quickly and efficiently restructure their affairs. Where restructure is not possible, businesses can wind up faster via the simplified liquidation process, designed to enable greater returns for creditors and employees.
The new small business insolvency reforms (see link below) include:
A new Debt Restructuring Process for small businesses;
Temporary restructuring relief; and
A new Simplified Liquidation Process for small businesses.
For more information about the Small Business insolvency and restructuring reforms, please access our separate article HERE
Changes to Bankruptcy laws:
In March 2020, the Australian Government announced a series of changes to bankruptcy law, as part of the wider economic response to the COVID-19 pandemic.
Those temporary changes included:
an increase in the debt threshold, which enabled creditors to apply for a bankruptcy notice;
an increase to the timeframe for a debtor to respond to a bankruptcy notice; and
an increase to the temporary debt protection period available to debtors.
As of 1 January 2021, those temporary changes have ceased, however, an amendment has been made to adjust the bankruptcy threshold amount.
the minimum amount of debt that can trigger bankruptcy is now $10,000 (down from $20,000 under temporary changes). Before the temporary changes, the minimum amount of debt that could trigger a bankruptcy was prescribed at $5,000.
The timeframe for a debtor to respond to a bankruptcy notice has reverted to 21 days (from 6 months under temporary changes). This means if a bankruptcy notice is issued on or after 1 January 2021, the debtor will have 21 days to comply with the bankruptcy notice.
The period for temporary debt protection for debtors has reduced from six months (under temporary changes) to 21 days.
Two or more creditors can combine their judgement debts to meet that minimum amount and together apply to court to petition to have a mutual debtor declared bankrupt
Back on the discussion table for government is the potential permanent bankruptcy reform to reduce the default bankruptcy period from three years to one year. That potential reform had stalled previously, but it may become a reality 2021.
Effective as at 1 January 2021, for creditor’s statutory demands against companies:
the minimum amount of debt for a statutory demand, that can trigger a winding up application, is now $2,000 (down from $20,000 under temporary changes), which is back to the way it was before the temporary changes.
The timeframe for a debtor to respond to a statutory demand has reverted to 21 days (from 6 months under temporary changes). This means if a statutory demand is issued on or after 1 January 2021, the debtor will have 21 days to comply with the statutory demand.
Ends 28 March 2021.
According to Federal Treasurer the Hon Josh Frydenberg MP, JobKeeper has costs $77 BILLION to date and at its peak was supporting 3.6 million Australian workers and around 1 million Australian businesses.
JobKeeper has now entered the second phase of its extension (from 4 January 2021).
In this current phase, eligible businesses receive $500 per week for each staff member working at least 20 hours per week, down from $600. Other employees attract a payment of $325 per week, down from $375.
The tier 1 rate applies to eligible employees who worked for 80 hours or more in the four weeks of pay periods before either 1 March 2020 or 1 July 2020, and eligible business participants who were actively engaged in the business for 80 hours or more in February and provide a declaration to that effect.
The tier 2 rate applies to any other eligible employees and eligible business participants.
We anticipate that a significant number of businesses currently being kept alive solely by JobKeeper, will enter External Administration sometime after 28 March 2021.
Practical tips & takeaways
Use the correct and updated Statutory Demand and Bankruptcy Notice forms to avoid challenges relating to material deficiencies in light of the above changes effective from 1 January 2021.
Directors who think their companies were trading insolvent prior to 1 January 2021 (or since) should seek professional advice urgently to consider the options for their business and their personal position.
Pressure from creditor enforcement being able to resume, and from JobKeeper coming to an end, will see an increase in companies entering External Administration and personal bankruptcies, likely from about March 2021. Business owners, directors and creditors should prepare themselves for new waves of insolvency and restructuring coming soon.
If you have felt the effects of the pandemic on your business or require assistance or clarification in relation to the ending of the temporary relief for financially distressed companies and businesses, now is the time to get advice on how to structure your company’s affairs or recovery activities.
Speak with one of Rostron Carlyle Rojas Lawyers’ qualified restructuring and insolvency lawyers today, at:
QLD: 07 3009 8444
NSW: 02 9307 8900
Email: [email protected]