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Coronavirus and Changes to Insolvency Laws.

22 May 2020

Coronavirus’ effects have been far and varied, effecting all facets of our lives. For those operating in the insolvency industry, recent changes to commonwealth bankruptcy and corporate insolvency law have provided temporary relief for those individuals and businesses that are facing financial hardship. Although these legislative changes have provided some respite, it remains to be seen the long-term effects these temporary amendments will have.

Corporate Insolvency Reforms.

The Australian government announced its temporary corporate insolvency law reforms contained in Schedules 8 and 12 of the Coronavirus Economic Response Package Omnibus Act 2020 (CERP Legislation) on the 22nd of March 2020. The CERP Legislation changes will be in effect until 25 September 2020 unless a later date is arranged.

The CERP Legislation has enacted changes to the way Statutory Demands are issued and responded to under Section 459E of the Corporations Act. The changes have included an increase to the minimum amount of debt owed from $2,000 to $20,000 by a company before it can be issued with a statutory demand.

Also amended is the amount of time a company has too respond to a statutory demand, increasing from 21 days to six months. It is hoped that this time extension, will relieve company Directors of stresses while they navigate the difficult circumstances resulting from COVID-19.

The liability the director/s of a company bears to prevent a company from trading insolvent has also been temporarily relieved, with the CERP Legislation providing a special safe harbour provision. Although this does not relieve a company of paying debts it incurs through the normal course of business, it is hoped to provide businesses confidence to continue trading through troubled times.

Both the changes to Statutory Demands and the liability of directors to prevent insolvent trading have been given a shelf life of six months from 25 March 2020, unless a longer period is given.

As the situation continues to change the CERP Legislation also grants the Treasurer temporary powers to amend provisions of the Corporations Act on an ongoing basis.  Again, this instrument is provided to the Treasurer for 6 months, and any amendments made to the Corporations Act by the Treasurer will apply for 6 months from the date it is made.

Personal Insolvency Reforms

Similar temporary relief measures have also been made to assist individuals who are facing potential bankruptcy action. Amendments again have been prescribed by the CERP Legislation, although for personal insolvency they now pertain to the Bankruptcy Act 1966 (Cth).

Much like the issuing of a Statutory Demand, amendments have been made to the way in which a creditor can request an Official Receiver to issue a bankruptcy notice and obtaining a judgement against a debtor.   

Creditors must now obtain a judgement or order against a debtor for $20,000, an increase from $5,000, before it can make a request of the Official Receiver to issue the creditor with a bankruptcy notice.

The CERP Legislation has also proscribed an extension to the time which a creditor has to respond to a bankruptcy notice from 21 days to six months.

A temporary extension has also been implemented to the debtor protection period for those seeking to become bankrupt voluntarily through a debtor’s petition. Prior to presenting a debtor’s petition, those seeking to become bankrupt can present a declaration to an Official Receiver outlining their intention to obtain, complete and present a debtor’s petition. If the Official Receiver accepts this declaration the debtor is granted with a stay period of 21 days in which other unsecured creditors are not permitted to apply for enforcement of their claim. Under the CERP this 21-day debtor protection period has been extended to six months.

Again, like the changes made to corporate insolvency laws, these changes will apply for six months from 25 March 2020.

The Bottom Line

The obvious question to ask at this point is, are these measures going to provide necessary respite to stable and profitable business (or individuals) who are suffering recent hardship because of the Coronavirus crisis? Or will these measure simply delay the inevitable demise of habitually insolvent businesses and individuals?

The anti-climactic answer to those questions is we do not quite know yet. The Australian Securities & Investment Commission (ASIC) is yet to release its figures of Australian insolvency statistics for the month of April. As these amendments prescribed by the CERP Legislation only came into effect at the end of March, the monthly statistics for the month of March are not a reliable source for comparison.

Macks Advisory believes however that the most useful data to determine the effectiveness of the CERP Legislation amendments (specifically for corporate insolvency) will come in the quarterly summary of companies entering external administration at the beginning of 2021. By this time, the CERP Legislation would have been in effect for the June and September quarters of 2020, with corporate and personal insolvency procedures reverting back to their normal course on the 25th of September 2020 unless it is subsequently extended. Therefore, the December 2020 quarterly figures will show the true extent of the Coronavirus on the Australian business landscape.

Disclaimer: The information contained in this webpage is general information and does not constitute legal advice. Nothing in this webpage is or purports to be advice. If you do need advice, then you ought to seek and obtain appropriate personal professional advice based on your personal circumstance.

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