Preventing a Tsunami of Insolvencies
The Government has stepped in to prevent a wave of insolvencies when the COVID-19 support measures run their course in December 2020.
Temporary insolvency and bankruptcy protections are in place until 31 December 2020 to enable businesses to trade through the pandemic. The measures provide:
- A temporary increase in the threshold at which creditors can issue a statutory demand on a company (from $2,000 to $20,000) and the time companies have to respond to statutory demands they receive (21 days to 6 months);
- A temporary increase in the threshold for a creditor to initiate bankruptcy proceedings (from $5,000 to $20,000), an increase in the time period for debtors to respond to a bankruptcy notice (21 days to 6 months), and extending the period of protection a debtor receives after making a declaration of intention to present a debtor’s petition;
- Temporary relief for directors from any personal liability for trading while insolvent; and
- Flexibility in the Corporations Act 2001 to provide targeted relief for companies from provisions of the Act to deal with unforeseen events that arise as a result of the Coronavirus health crisis.
Between March and July 2020, there was a 46% decrease in the number of companies that have gone into external administration compared to the same period in 2019.
Anticipating a wave of insolvencies in early 2021, the Government has moved to streamline insolvency laws to enable small business to either restructure or efficiently wind up. There are three key elements to the reforms:
- A new formal debt restructuring process for companies that will enable a business to keep trading under the control of its owners while a debt restructuring plan is developed and voted on by creditors.
- A new, simplified liquidation pathway for small businesses to allow faster and lower-cost liquidation.
The measures will be available to businesses with liabilities of less than $1 million. You can find further information on the proposed insolvency reforms here.
In Australia, the insolvency laws currently do not differentiate between large and small businesses. Everyone goes through a similar process. For small business, the complexity and the cost of adhering to the current insolvency system often leaves little for creditors, makes it difficult to restructure, and places control of the business in the hands of an administrator. These reforms should help simplify the process.
A note on debtor management
With 46% less insolvencies between March and July this year compared to last year, it’s clear the COVID-19 protections have not only protected business against COVID-19 trading conditions but also protected against natural attrition in the market.
It’s essential in the lead up to Christmas and into the New Year you keep tight control of your debtors! Review your account management and debtor policies and keep tight controls.
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