Insolvency Alert – Insolvency Risk Management in light of COVID-19 temporary amendments extended to 31 December 2020

In late March we summarised a suite of measures introduced by the Federal Government to try and prevent a torrent of personal and corporate insolvencies.  In brief, for a period of six months:

• the time with which a company has to respond to a ‘statutory demand’ – a formal demand for payment of an undisputed debt issued under the Corporations Act and a common precursor to liquidation – was extended from 21 days to 6 months;
• the minimum debt which could form the basis of such a demand was increased from $2,000 to $20,000; and
• some laws targeting insolvent trading by directors were relaxed such that potential liability for the same was suspended.

The measures were originally scheduled to end in September 2020 but have recently been extended until 31 December 2020.  Together with economic stimulus measures, these changes have largely worked as intended, with insolvency appointments down by about 50% year on year; indeed, the measures have been so successful that many insolvency firms are accessing the JobKeeper scheme for their own purposes.  The policy priority is keeping people employed in the present.

The extension of these measures while protecting the position of businesses that are facing what is hoped to be temporary financial difficulty, does however, put at risk and prejudices the position of their creditors who are effectively unable to pursue recovery of long overdue debts a common methods of debtor recovery i.e. winding up and bankruptcy, for a period which will now extend into 2021.  Further, there is a real risk that such businesses by continuing to trade may incur further losses and a diminution in assets but eventually collapse months later, leaving the creditors who have been forced to wait to exercise their rights, with little opportunity to recover their debts.

ASIC and the federal government do, however, expect a significant increase in insolvencies as stimulus measures are wound back.  Access the Government’s Insolvency reforms to support small business fact sheet here.

For further information on insolvency matters, whether relating to the impacts of COVID-19 or otherwise, please contact a member of our national Restructuring and Insolvency team.

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