Insolvency Law Reforms

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With the proactive changes announced over the weekend by Treasurer Josh Frydenberg to the Corporations Act and the country’s insolvency laws, Australian businesses (and in particular small businesses) have been extended a lifeline for, at least, the next 6 months.

In short, the main changes are:

  • The thresholds for serving a Statutory Demand upon a company or Bankruptcy Notice upon an individual have increased to $20,000.00;
  • The time frame that debtors will have to comply with Statutory Demands and Bankruptcy Notices has increased from 21 days to 6 months;
  • Directors will be provided temporary relief for 6 months from any personal liability for insolvent trading of their companies, where the debts are incurred in the ordinary course of their company’s trading.  Their companies though will continue to be liable for those debts;
  • The ATO will now look to tailor solutions for their taxpayers’ circumstances, including temporary reduction of payments or deferrals, or withholding enforcement actions including Director Penalty Notices and wind-ups.

There is no doubt that these changes, along with the other relief or stimulus provided by the governments, RBA and Banks, will provide further significant assistance to businesses as they seek to remain viable over the next 6 months.

The result is that businesses have been handed a meaningful opportunity to:

  1. Consolidate debt;
  2. Renegotiate debt terms (at a time when money has never been ‘cheaper’);
  3. Take advantage of the government’s cash offerings;
  4. Take a breath and examine balance sheets, including asset holdings – what can be liquidated and perhaps leased back (thus releasing working capital and assisting with cash flow);
  5. Properly consider any necessary business restructuring and effect those changes;
  6. Negotiate with creditors on supply and payment terms;
  7. Review their own trading terms;
  8. Revisit the debt/security position of the business, including priorities, especially if a business owner is lending money to a business to keep it going;
  9. Revisit staffing requirements; and
  10. Respond to the sudden crisis with informed decision making.

By relaxing the liability of directors for insolvent trading (absent fraud or dishonesty) the government is hoping to ensure continuity of leadership and decision making and avoid the loss of business knowledge.

This reprieve will be in addition to the 2017 “safe harbour” amendments which are aimed to protect directors from liability while their company was ‘technically’ insolvent.

As mentioned, it is intended these new measures will be operative over the next 6 months, but they may need to be reviewed over that period, or perhaps at the end of that period.

That said, we must note that creditors, many of whom are themselves small businesses, will still have the right to enforce debt against companies or individuals through the courts.

However, while creditors may seek to start recovery proceedings, they will have to face the fact that many of the Courts around the nation have announced or will be announcing changes to their way of operating to also take into account the impacts of the COVID-19 virus, including, for example, some not setting down matters for hearings or trials over the next 3 months, unless urgent.

This will also help to temporarily relieve the pressure valve in recovery matters, but will not remove the risk of civil action and having to take steps in those actions generally.

There will still also be a need for businesses to continue to plan, and act responsibly and constructively in their particular circumstances, with a view to trying all that is reasonably practical to remain viable during and beyond 6 months.

As part of those efforts, they will need to ensure they work co-operatively and transparently with their secured and unsecured creditors, to continue to engender goodwill, good faith and strong support in their trading relationships at this difficult time.

Not doing so may mean that secured creditors take steps in respect of their security, or unsecured creditors take action in respect of debts, or where they are owed in excess of $20,000, they seek to issue Statutory Demands and Bankruptcy Notices, as applicable, albeit on the basis they can only move on them at the expiry of the 6 months.

The government’s law reform measures are not, however, a ‘magic wand’, they will undoubtedly allow businesses much need time to seek advice, and to deal with the situation (and what is to come) in an informed proactive manner.

Getting on the front foot and putting into place appropriate action plans with the assistance of appropriate professional advisors, which may include some form of turnaround strategy or restructure, will greatly increase a business’s survival chance.

Beyond that, we hope that the State Governments will similarly act to assist businesses in a constructive and meaningful way, including in their dealings with their landlords and legislate to extend the time for a business to comply with a Form 7 for rental arrears and stiffen a landlord’s ability to call on security deposits and bank guarantees. This is a must if tenant businesses are to be able to work within the Federal government’s ‘new world’.

Please contact Mills Oakley if you require any further information about these reforms or if you need assistance in addressing them or any issues arising, including any insolvency, litigation or Workplace issues.

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