Insolvency Alert – Insolvency Risk Management in light of COVID-19

25 March 2020

Publications

The Federal Government has announced temporary changes to insolvency and bankruptcy laws in response to COVID-19.

These are intended to provide a safety net for business owners and minimise the need for voluntary administration or liquidation.

The main measures are:

  • Increasing the time by which a debtor is required to respond to a bankruptcy notice or statutory demand from 21 days to 6 months;
  • Increasing the minimum amount of debt required to be owed by the debtor before a creditor can initiate insolvency proceedings from $2,000 to $20,000; and
  • Providing a temporary ‘safe harbour’ for company directors by introducing temporary relief from personal liability for insolvent trading, if debts are incurred in the ordinary course of business.

The changes are effective from today and will be operational for 6 months.

It is unclear whether the changes will extend to the laws affecting liquidator clawback claims.

Businesses should bear in mind that “insolvency” is not a temporary cash-flow shortage but rather a condition that is endemic.  While the announced measures appear likely to defer legal process and relax personal liability and offence provisions in connection with debts incurred in the next 6 months, their likely effect on other underlying legal duties such as due diligence is less clear.  It ultimately remains incumbent on directors to properly assess the longer term viability of their business and act reasonably.

The relaxation of Australian insolvent trading laws is critical during the COVID-19 crisis because they potentially extend liability to foreign parent companies. This is a key issue for foreign owned Australian companies.

We are continuing to provide advice to our clients in relation to insolvency matters, whether relating to the impacts of COVID-19 or otherwise.  Should you require assistance you are welcome to contact any member of our national Restructuring & Insolvency team.

Michael O’Donnell | Partner | +61 8 8236 1396 | modonnell@tglaw.com.au

Michael Barrett | Partner | +61 8 8236 1130 | mbarrett@tglaw.com.au