COVID-19 – Temporary Relief for Cash Strapped Businesses

On 22 March 2020, in response to the debilitating effect of the COVID19 virus on businesses of varying sizes, the Federal Government announced its ‘Temporary relief for financially distressed businesses’ or to be precise the Coronavirus Economic Response Package Omnibus Bill 2020.  While only time will tell whether the temporary measures will in practice free up cash for distressed businesses, it seems to us that they will provide some breathing space for companies to keep their doors open in these difficult times.

The temporary measures include:

  1. An increase in the monetary threshold for the issuing of a creditor’s statutory demand from $2,000 to $20,000 and for the issuing of bankruptcy notices from $5,000 to $20,000.
  2. An increase in the time for compliance with a creditor’s statutory demand and bankruptcy notices from 21 days from service to 6 months.
  3. An increase in the period of protection for a debtor after the filing of a declaration of intention to present a debtor’s petition from 21 days to 6 months.
  4. Temporary relief from personal liability for insolvent trading.

These temporary measures will only apply for a period of 6 months.

Changes to Creditor’s Statutory Demands and Bankruptcy Notices

A failure by a company to appropriately respond to a statutory demand creates a presumption of insolvency, allowing a court to order the company to be wound up.  The extension of time to comply with statutory demands and bankruptcy notices is intended to give businesses more time to consider repayment arrangements before considering the implementation of formal insolvency processes. Despite the extended time for compliance, anyone served with a creditor’s statutory demand or bankruptcy notice should still act early and seek advice from an appropriately qualified professional as to their options. Further, a business looking to recover a debt in these uncertain times, should give consideration to alternatives such as entering into payment arrangements with debtors rather than issuing a demand and having to wait for 6 months before seeking recovery through formal insolvency processes.

Whilst the six months of ‘breathing space’ will give businesses time to address creditor demands, careful attention still needs to be paid to the flow on effects of receiving a statutory demand. Often the receipt of a demand can, despite the extended six month period to comply, result in an automatic default under a business’ debt financing arrangements and potentially material supplier or customer contracts. Accordingly, a  proactive approach to managing the receipt of these demands remains critical

Insolvent Trading Relief

The Government’s announcement regarding relief from insolvent trading liability is intended to give directors the confidence to trade their companies through this difficult time without the risk of personal liability, in the aim of returning the company to strength as the crisis passes.

It is important to remember that:

  • The temporary relief only applies to debts incurred in the ordinary course of business.
  • Whilst a director may be relieved from personal liability for insolvent trading during this period, debts incurred by the company will still need to be paid and it will still be open to a creditor to issue court proceedings to sue in respect of the debt.
  • Consideration should also be given to other ramifications of non-payment of a debt such as any implications of being put on cash on delivery terms or having supply stopped. There may also be other implications for non-payment under the relevant contract such as enforcement of security or penalty interest rates.
  • Directors will need to remain mindful of their statutory and common law directors’ duties which continue to apply notwithstanding the relief from insolvent trading.
  • The safe harbor protections will still be relevant as the temporary relief period expires. Although the safe harbor provisions can provide relief to directors at the end of the six month period against insolvent trading at that point, it may be that many directors are unable to access the safe harbor provisions if their company has been unable to keep up with payment of its employee entitlements (including super) and tax reporting obligations, as those failures prevent access to the safe harbor provisions.

It is important to note that the temporary measures will only apply to statutory demands and bankruptcy notices issued after the bill was enacted.

Key Messages

  • Get advice from an appropriately qualified professional in a timely manner whether you are a debtor or a creditor
  • Attempt to deal with suppliers and other creditors to reach agreement as to terms early, before formal action is taken
  • Directors need to continue to comply with their statutory and common law duties, which continue to apply notwithstanding any relief from insolvent trading

If you are looking for guidance on your rights and obligations around these issues, please call Lauren Crosby or Michael Garry.