Temporary Insolvency relief for covid-19

On 22 March 2020, the Federal Treasurer announced new measures, which will provide temporary relief from insolvency for people and businesses struggling as a result of the coronavirus outbreak.  

The Treasurer’s full media release can be accessed here:

https://treasury.gov.au/sites/default/files/2020-03/Fact_sheet-Providing_temporary_relief_for_financially_distressed_businesses.pdf

What has changed? 

The main changes announced are:

  • Increasing the threshold for creditors to issue statutory demands from $2,000 to $20,000;
  • Increasing the time for a company to comply with a statutory demand from 21 days to 6 months;
  • Increasing the threshold for creditors to initiate bankruptcy proceedings from $5,000 to $20,000;
  • Increasing the time for an individual to comply with a bankruptcy notice from 21 days to 6 months;
  • Increasing the period of protection an individual received after lodging a notice of intention to file debtor’s petition from 21 days to 6 months; and
  • Relieving directors from their duty to prevent the company from trading while insolvent, and releasing them from personal liability for debts incurred in the ordinary course of the company’s business, for 6 months (this will not protect directors from debt incurred by fraud or other reckless or egregious conduct).

What has not changed? 

Debts incurred by a business still need to be paid.

Although businesses are being encouraged to attempt to keep trading and directors will be relieved from personal liability for debts incurred for a period, debts incurred by a company in this time are not ‘forgiven’ and must still be paid.

Creditors who are owed money can still pursue those debts.  

In a lot of cases, statutory demands are issued after a creditor obtains a judgment against the debtor for the debt they are owed. Bankruptcy notices can only be issued after a creditor obtains a judgment against the debtor.  So, there is likely to still be a need for creditors to seek a judgment for their debt through the courts.  Disputes about debts often take a while to resolve, and if court proceedings are required, it is likely that it will take longer than 6 months for a judgment to be handed down.

Secured creditors can still have recourse to their security. 

These proposed changes do not appear to affect the rights of a secured party to enforce its security, including by appointing receivers to a company under the terms of the security.

Statutory demands and bankruptcy notices still need to be complied with and should still be taken seriously. 

While 6 months is a far longer period than the existing period of 21 days, a statutory demand or bankruptcy notice still needs to be dealt with and addressed, or the debtor company or individual will face the possibility of winding up or bankruptcy.

Other enforcement alternatives may be available. 

For judgments issued out of the Supreme, District and Magistrates Courts of Western Australia, the Civil Judgments Enforcement Act 2004 provides some alternative methods of enforcing a judgment debt, including seizing and selling property and making orders for payment of the debt in instalments or by a certain deadline.

What should you do?

If you are an unsecured creditor who is owed money by a debtor, you should consider whether it is appropriate to issue a statutory demand or whether it is appropriate to commence legal proceedings against the debtor to obtain a judgment.  It is important to seek legal advice about your specific circumstances and the particular debt, as each situation may warrant a different approach.

If you are a secured creditor, enforcing your security appears to still be an option.  But you should make sure your security is properly registered, to avoid it being defeated by the appointment of an administrator or liquidator.  Also, depending on your security, this option may not be open indefinitely, if the debtor company takes steps to place the company into administration.  It is important to seek legal advice about your particular security and any registration requirements, to make sure you do not lose any rights you may have.  At Valenti Lawyers, we are able to advise and assist you with creating, registering and protecting your security interests.

If you are a business or debtor and are experiencing hardship, the best thing you can do is seek advice immediately.  While these changes will greatly assist businesses in trouble, the more you do now to address the issues you are facing, the greater chance your business will have of surviving the COVID-19 crisis.

How can we help?

At Valenti Lawyers, we are experienced in insolvency and restructuring, as well as commercial litigation and debt recovery, and we are happy to help with any issues you or your business might be facing.  We also have a number of strong relationships with accountants and insolvency practitioners who are prepared to meet with clients on a reduced-fee or no-fee basis to explore your options.

Please do not hesitate to reach out to us.  In keeping with the advice of health professionals, we would be happy to discuss any concerns or queries you have by telephone or video conference.

Please note, these comments are general in nature and are not intended as legal advice.

 

Nick Steinsvaag