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A Six Month Suspension of Insolvent Trading Laws: a solution or a recipe for disaster?

Tuesday March 31, 2020

A Six Month Suspension of Insolvent Trading Laws: a solution or a recipe for disaster?

We live in interesting times.  COVID-19 has impacted all aspects of our lives and on 24 March 2020 we have been introduced to the Coronavirus Economic Response Package Omnibus Act 2020 (CERPO Act) that (among other things) introduced a number of new measures to provide flexibility in the Corporations Act 2001 (Cth) (Corporations Act) and temporary relief for financially distressed individuals and businesses.

The current Corporations Act provides for a very efficient and relatively straight forward way to obtain payment of an undisputed debt owed by a company.  A creditor may serve a statutory demand on a debtor company if:

  1. that company owes a liquidated debt of at least $2,000;
  2. there is no dispute as to whether the owed amount is due and payable.

Once served, the debtor company has 21 days to pay the debt, to reach an agreement to repay, or to apply for an order to set aside the demand on the basis (usually) that there is a genuine dispute about it. If none of these things occur the debtor company is deemed to be insolvent, in which case the creditor can make an application to wind up the company.

CERPO Act has amended this part of the Corporations Act to alleviate the danger of being served with a Statutory Demand in the current circumstances when businesses are being compulsorily shut down or forced into hibernation.  The creditor can still serve the debtor company with a Statutory Demand.  The relevant changes implemented by CERPO Act however are:

  1. the company needs to owe a liquidated debt of at least $20,000;
  2. there is no dispute as to whether the debt is due and payable; and
  3. the debtor company has six months from the date of service to comply with the demand, or take action to set it aside.

What does this all mean?

The main purpose of such drastic changes is to give businesses a reprieve to continue operating during the outbreak and provide them with an opportunity to recover after the outbreak has passed.  Further, this means that companies that are currently struggling due to COVID-19 could also experience less pressure from the ATO who will 'tailor solutions for their circumstances, including temporary reduction of payments or deferrals, or withholding enforcement actions including Director Penalty Notices and wind-ups'.

The possible trap

Companies, which already were struggling prior to the outbreak may receive some reprieve and consider that they can operate while the company is possibly insolvent.  This creates further complications.  It may be that the directors cannot be prosecuted at the moment for allowing the company to trade whilst insolvent however, when the time comes, the authorities may come down on such directors with full force.

Incidentally, if you are owed money by an individual and were thinking of serving them with a Bankruptcy Notice, think again.  Bankruptcy Act 1966 currently provides that a Bankruptcy Notice may be served where the debtor owes at least $5,000 and the individual then has 21 days to pay the debt, to reach a compromise or to apply to set aside the Notice.

Similarly to the changes to the Corporations Act, CERPO Act has amended the Bankruptcy Act as follows:

  1. the debtor now needs to owe at least $20,000 and
  2. he or she has six months to pay the debt or make an application to the court to have it set aside.

These changes to both regimes are temporary and due to expire on 25 September 2020.

The Government is to be applauded that it has taken an initiative to support businesses in this difficult time, however, a creditor can also be a small business that is suffering because a debtor is not paying its debt.  This means that although on the one hand we have prevention measures to support businesses and individuals, on the other hand businesses that suffer because of the non-payments by their debtors will probably disappear. 

In these drastic times if you are a creditor you may still proceed with enforcing your rights by issuing a court proceeding to obtain a court judgment.  Once a judgement is obtained the debtor will be liable not only for the amount owed, but for interest and legal costs also.  There are other potential steps that can then be taken to attempt to enforce the judgement.

Please contact Matthew Hicks or Harish Nair with any queries.