Treasury confirms insolvency safeguards extended

In March 2020, the Australian Government introduced new measures to relax the laws relating to insolvency and bankruptcy to assist businesses and individuals who may be facing financial distress.

Today, the Federal Government confirmed that these protections will now remain in force until 31 December 2020. We summarise the safeguards below:

• directors will be relieved of their personal liability for insolvent trading. However, egregious cases of dishonesty and fraud will still be subject to criminal penalties
• the minimum threshold for a creditor to issue a statutory demand to a debtor company will remain at $20,000 (originally at $2,000)
• the period in which a debtor company has to respond to a statutory demand will remain at six months (originally within 21 days)
• the minimum threshold for the issuing of a personal bankruptcy notice will remain at $20,000 (originally at $5,000)
• the period in which a person has to respond to a bankruptcy notice remains at six months (originally within 21 days)

In extending the relief to 31 December 2020, Treasurer Josh Frydenberg confirmed in his media release:

“The extension of these measures will lessen the threat of actions that could unnecessarily push businesses into insolvency and external administration at a time when they continue to be impacted by health restrictions.”

Although the extension provides directors with further protection against insolvent trading liability until the end of 2020, it does not displace the statutory obligations placed on directors by the Corporations Act. In particular, directors need to consider whether the decisions they are making, including the decision to trade on, are in the best interests of the company’s shareholders and creditors. Directors should also be mindful of exposing themselves to personal liability under any guarantees they have provided as security for the company’s obligations. Our previous discussion on some of the important duties directors owe to their companies can be read here.

Businesses should also be mindful of a ‘relaxed’ approach by their corporate counterparties in light of these changes. In addition to losing the statutory demand as a tool for debt collection, the government measures do not extend to unfair preference claims. This means creditors are at risk of having to disgorge payments received from counterparties who become insolvent for the six months leading up to the insolvency appointment as an unfair preference. For further guidance on how directors can protect themselves and their business, click here.

The media release from Josh Frydenberg and Christian Porter can be read here.

Authors: Mitchell Waters & Madeleine Marchingo

Disclaimer
The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this newsletter is accurate at the date it is received or that it will continue to be accurate in the future.

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