How is the Federal Government assisting financially distressed businesses aside from JobKeeper?

In our previous Insight articles we discussed the changes to insolvency laws[1] and safe harbour laws in Australia,[2] including the various measures introduced by the Coronavirus Economic Response Package Omnibus Act 2020 (Cth),[3] to assist people and businesses by preventing unnecessary insolvencies and assisting businesses with managing debts.

On 9 September 2020, the government announced its plan to extend the temporary relief for financially distressed businesses and individuals impacted by the COVID-19 crisis.

As a result, from 22 September 2020, the regulatory relief has been extended until (at least for now) 31 December 2020 by the Corporations and Bankruptcy Legislation Amendment (Extending Temporary Relief for Financially Distressed Businesses and Individuals) Regulations 2020 (Cth).

Creditor’s Statutory Demand for Payment of Debt

How long is the deadline for responding to a Creditor’s Statutory Demand?

Whilst prior to the COVID-19 response, a company served with a Creditor’s Statutory Demand had 21 days from the date of service of the demand to comply with the demand, compound the debt (agree with the creditor to pay it off over time, or some other forbearance) or issue court proceedings. The COVID-19 response increased the deadline from 21 days to 6 months, and this requirement has been extended until 31 December 2020.

How much does a debt need to be before a Creditor’s Statutory Demand can be served?

The COVID-19 response increased the statutory limit of the debt claimed from $2,000 to $20,000. This has also been extended until 31 December 2020.

This means that a company served with a Creditor’s Statutory Demand in a sum exceeding $20,000 must settle the debt to the creditor’s satisfaction or bring an application to set aside the demand[4] within 6 months of service to avoid a presumption of insolvency.

Safe harbour provisions arising from COVID-19?

The COVID19 Response introduced safe harbour provisions protecting company directors from insolvent trading during this time. This was to give company directors more confidence in trying to trade out of the COVID-19 imposed business slump, without fear that, if they can’t make it out, they would become personally liable for their company’s debts.

Is a director personally liable for debts incurred by a company during COVID-19?

From 26 March 2020 until (with the benefit of the amendments) 31 December 2020, company directors are protected from liability for insolvent trading for debts that the company incurs if:

1. the debt is incurred in the ordinary course of the company’s business;
2. the debt is incurred during the period of 25 March 2020 to 31 December 2020; and
3. the debt is incurred before any appointment of an administrator or liquidator of the company during the period of 25 March 2020 to 31 December 2020.

To substantiate that a debt is incurred in the ordinary course of business, the company will need to demonstrate that the debt was necessary to facilitate the continuation of the business.

What does a director or board do if a company is still struggling in December 2020?

Subject to any further extensions (noting JobKeeper has been extended to the end of March in its updated form, so there is prospect of this), directors and company boards will need to consider the financial position of their company prior to 31 December 2020 to determine whether the company is insolvent and, if a director considers that the company will be insolvent when the temporary safe harbour ends at 31 December 2020, then the director should either:

• put in place a recovery plan under section 588GA to remain in the safe harbour, which requires input from professional advisers that establishes a strategy to get creditors and shareholders a better return than if the company were to be placed into administration; or

• appoint an external administrator on, before, or as soon after 1 January 2020 as possible.

How can DSA Law help?

As you can imagine, our team are already being inundated with requests for assistance as the legislative landscape continues to change.

If you think your company might still be struggling come the end of this year, we highly recommend you reach out to us now so that you can be best prepared to deal with whatever reality your company faces on 31 December 2020.

Therefore, if you have a bankruptcy or insolvency issue, please Contact Us or one of the Commercial Lawyers at DSA Law on (03) 8595 9580 so we can assist you with your concerns.

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[1] COVID-19: What are the changes to insolvency laws in Australia

[2] COVID-19: What are the safe harbour laws in Australia?

[3] Coronavirus Economic Response Package Omnibus Act 2020

[4] Corporations Act 2001 (Cth), s459G

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