The past few months have seen swift and vast changes for businesses, of all sizes; from local services to multinational corporations, the sting of COVID has not discriminated. With its relatively fast trajectory, businesses have had to find their footing with little time to establish re-navigation strategies and contingency plans. With that, the Government recently implemented temporary changes (effective March 25, for six months) to insolvency and corporations’ law in response to the pandemic. If you’re a business owner, these changes can come as a huge relief if you’re struggling to keep your head above water. However, it is vital to fully understand what they mean for you by utilising the skills and knowledge of professionals who will direct you through the best outcomes for these circumstances.
Here are the changes, and how we can help.
Directors will be removed from all personal liability for trading
What does this mean?
To ensure trust and confidence in trade is retained, directors will not be held personally accountable for continued necessary debt accrued while keeping the business running as normal despite being insolvent, for the period of the six month provisions. For example, if a business loan is taken out to make it through this time. This change pivots away from the previously existing provision prohibiting directors to continue trade while insolvent, facing personal liability and possible legal penalties, incurring new debt through continued normal business.
How we can help
It’s important that any new debts accrued remain in the best, and realistic, interest of the business’s survival. While there is a six month provision period for personal liability, it should not be seen as a green light to overextend your financial obligations and so cause your business to face unnecessary continued hardship after this period. We are able to guide you through your legal responsibilities after this period and measure the health of your business so that it will be able to survive beyond the six month period with the inclusion of new debt. This provision does not cover debts that are outside of the ‘ordinary course of business’ and, if so, personal liability is instated, making it even more important to consult professionals to best understand your options and protection.
The threshold for bankruptcy proceedings extends from $5,000 to $20,000
What does this mean?
Previously, bankruptcy proceedings were faced if you owned a creditor/creditors a debt over $5,000. These changes have increased the threshold of bankruptcy to $20,000 for the six month period, and the time to respond to a bankruptcy notice is now six months, as opposed to the previous 21 days.
How we can help
While six months can certainly help with more time to negotiate repayments and payment schedules, it is important to understand that six months is also a relatively short period of time and real action is required if you’re facing bankruptcy. Again, this is not a green light to be complacent with your debt, or see the $20,000 has an adequate buffer of debt to reach. We still want to avoid accumulating more debt with creditors despite the short term legal protection. We can ensure that you use this six month period to make the best financial and organisational decisions to avoid bankruptcy, or adequately prepare for bankruptcy.
Threshold for formal demands of debts increased and extended
What does this mean?
The threshold for a creditor to issue a statutory demand for debts owed by a company has risen from at least $2,000 to $20,000, and the time period to comply with the demand has extended from 21 days to six months.
How we can help
As with all temporary changes to the insolvency and corporations legislation, these provisions are in place to assist with the preparation and organisation of debt repayment, and to keep companies afloat through the pandemic. It is not a debt erased, nor is it a debt that won’t continue to rise if you aren’t across how to best navigate through the six months as it pertains to the financial health of your business.
While the current time frame is six months starting March 25 2020, it comes with a caveat for creditors that an extension on this time may be given if restrictions from COVID continue.
Shaw Gidley are experts in restructuring, turnaround and insolvency and provide free initial advice on these matters. Please contact our offices on (02) 4908 4444 or (02) 6580 0400.
