The Federal Government has introduced significant and radical measures to soften the economic blow that will undoubtedly result from the Coronavirus (also known as COVID-19). Although there are various financial relief packages being rolled out, this article will focus on the measures intended to protect individuals and companies being pushed into insolvency.
Bankruptcy Act 1966
For a comprehensive explanation of the bankruptcy process, refer to our article on Bankruptcy.
To summarise, bankruptcy is a legal process that catches most of your debts and liabilities, and may provide somewhat of a “fresh start”.
Under the current legislation, an individual may voluntarily enter into bankruptcy (also known as a debtor’s petition for bankruptcy), or one of his or her creditors may apply to the Court (referred to as a creditor’s petition). In order to bring a creditor’s petition, a creditor must first apply to the Official Receiver for a bankruptcy notice to issue against the debtor. In order to make that application, the creditor must be able to demonstrate that:
- There is a final judgement confirming that the debt is outstanding (such as an order of the court); and
- The amount of the debt (or total of cumulative debts) is greater than $5,000.00.
Once issued, a creditor has six months to serve the bankruptcy notice on the debtor. Once served, the debtor has 21 days to make payment of the outstanding debt, or apply to have the bankruptcy notice set aside. In the event that a debtor fails to comply with a bankruptcy notice, the creditor may rely on same as a presumption of insolvency, and apply to bankrupt the debtor.
The temporary measures being introduced by the Federal Government will see the threshold of $5,000.00 increase to $20,000.00. Further, once served with a bankruptcy notice, a debtor will have six months to make payment, or otherwise apply to set same aside. This is a significant increased from the current 21 day period.
Corporations Act 2001
For a more comprehensive explanation of Statutory Demands and how they work, refer to our article “Statutory Demands“.
Currently, under the Corporations Act 2001 (“the Act”), a creditor may use a Creditor’s Statutory Demand for Payment of Debt (“Statutory Demand”) to recover an outstanding debt owed by a debtor company where same exceeds $2,000.00. This includes circumstances where the cumulative total of debts exceeds $2,000.00. Once a Statutory Demand is served (and assuming it complies with all requirements set out in the Act) a debtor company has 21 days to make payment (or otherwise apply to have the Statutory Demand set aside). If the debtor company fails to comply within that timeframe, the creditor can apply to have it wound up in insolvency, relying on the debtor company’s failure to comply as a presumption of insolvency.
Similar to the changes to bankruptcy notices, the proposed temporary measures will see the $2,000.00 threshold for Statutory Demands increase to $20,000.00, and the time to comply increased from 21 days to six months.
Further, company directors will enjoy temporary relief from any personal liability arising from insolvent trading. Ordinarily, a director will be personally liable for the debts incurred by the company in circumstances where the director knew, or ought to have known, the company was engaging in insolvent trading, though particularly bad examples of fraudulent or dishonest behaviour will still be actionable.
When will the changes take place?
Although the above changes are yet to be legislated, they have been drafted in the Coronavirus Economic Response Package Omnibus Bill 2020, which is expected to receive Royal Assent in the coming days. Once passed, the above measures will be in force for a period of six months.
It is our understanding that, upon receiving Royal Assent, the changes will apply:
- to bankruptcy notices issued after the provisions come into force; and
- to all statutory demands (whether new or existing).
There is no doubt that these measures will see a temporary decline in insolvency action, and hopefully provide some much needed relief to those in financial distress. Unfortunately, this may also limit debt recovery options available to creditors. Our article, Debt Recovery v Debt Management may provide some assistance in this regard. If you require further, tailored advice, please do not hesitate to contact us by phone or via the online link below.
It is worthwhile noting that the above measures are a small part of the relief packages being rolled out by the Federal Government. We encourage you to keep informed of the relief available to you, and to stay safe during these difficult and unprecedented times.