Commonwealth extends trading while insolvent protections

September 9, 2020 |

The Attorney General announced yesterday that the Commonwealth Government will extend the insolvency and bankruptcy protections previously enacted in relation to:

  • trading while insolvent
  • increasing the threshold at which creditors can issue a statutory demand and the time for responding to a statutory demand.

The protections will extend until 31 December 2020.

The Attorney General’s media release provides:

The Morrison Government will continue to provide regulatory relief for businesses that have been impacted by the Coronavirus crisis by extending temporary insolvency and bankruptcy protections until 31 December 2020.

Regulations will be made to extend the temporary increase in the threshold at which creditors can issue a statutory demand on a company and the time companies have to respond to statutory demands they receive.

The changes will also extend the temporary relief for directors from any personal liability for trading while insolvent.

These measures were part of more than 80 temporary regulatory changes the Government made designed to provide greater flexibility for businesses and individuals to operate during the coronavirus crisis.

The extension of these measures will lessen the threat of actions that could unnecessarily push businesses into insolvency and external administration at a time when they continue to be impacted by health restrictions.

These changes will help to prevent a further wave of failures before businesses have had the opportunity to recover.

In addition, the Government is providing an unprecedented level of support totalling $314 billion to cushion the blow for workers, households and businesses during the coronavirus crisis.

As the economy starts to recover, it will be critical that distressed businesses have the necessary flexibility to restructure or to wind down their operations in an orderly manner.

The Government will continue to help businesses successfully adapt and restructure so that they can bounce back on the other side of this crisis.

As the Age reports in ‘More harm than good’: Businesses get reprieve but thousands still set to fail on the the changes, importantly that the extensions may actually harm rather than benefit some companies in the long term.  I have noticed and it has been reported that the normal insolvency throughput has decreased as a result of these changes.  This report makes a similar point.  That may have the multiplier effect of insolvent companies not paying creditors over a longer period than would otherwise be the case, which compounds problems for creditors.

Of little doubt will be a significant surge of statutory demands in January with increased burden on the insolvency industry and the courts in the first half of 2021.

The article provides:

Shielding businesses from insolvency until the end of the year will leave 5000 companies facing closure in 2021 with tens of thousands more expected to struggle when government support ends.

The Morrison government has changed the cut-off date for insolvency safe harbour rules from late-September to December 31 in a bid to help companies stay afloat through the coronavirus pandemic and “bounce back” in future.

Industrial Relations Minister Christian Porter said the decision would “help to prevent a further wave of failures before businesses have had the opportunity to recover” and lessen the threat of actions that would push them into insolvency and external administration when health restrictions were still in place.

But CreditorWatch estimates there will be about 5000 businesses operating by the end of the year that would normally have closed without this protection, compared to 2500 expected if safe harbour rules ended in September. This figure is before counting businesses shutting due to the economic impacts from the virus, which has plunged Australia into recession.

CreditorWatch chief executive Patrick Coghlan said Victoria would be “even worse off” following Premier Daniel Andrews’ announcement on Sunday of a longer lockdown.

“It would’ve been extremely difficult and unpopular not to extend [insolvency safe harbour] but there was no choice from a political point of view in Victoria,” Mr Coghlan said.

He said the federal government “needs to work on a road out of the safe harbour provisions”, under which creditors are unable to issue statutory demands or bankruptcy notices unless the debt totals $20,000 or more. Directors are also protected from personal liability under insolvent trading rules if debts are incurred, except where they break the law.

Mr Coghlan warned the Christmas holiday period would be a particularly difficult time for businesses as there would be a surge of insolvencies at the same time as courts are closed and companies are on skeleton staff. Typically, January is the lowest month of the year for company wind-ups.

Chartered Accounts Australia and New Zealand business reform leader Karen McWilliams said the extension should be approached with caution.

“For some businesses, the government’s support will mean they can survive and recover but for many others, this extension will do more harm than good in the long-term,” Ms McWilliams said.

The situation has concerned the Australian Restructuring Insolvency and Turnaround Association whose chief executive John Winter said had left some businesses using the provisions as an excuse to not pay their bills.

“While the government was originally trying to reduce the risk of businesses insolvency, by holding back the avalanche for a while, they haven’t saved any businesses, they’ve just let more snow pile up on top,” Mr Winter said.

“It means that tens of thousands of businesses are going to get a statutory demand as their New Year’s Day card.”

Council of Small Business Organisations of Australia chief executive Peter Strong said “tens of thousands” of businesses are at risk in Victoria due to the extensions of the lockdowns ahead of the critical Christmas trading period. He said some companies are choosing to operate knowing they won’t revive so their workers can receive the JobKeeper wage subsidy rather than leave them on the lower JobSeeker dole payment.

“These aren’t businesses that are insolvent in the way you’d typically think about it, they’re government-imposed insolvencies,” he said, adding the state government should be covering rent costs and providing more support for affected companies.

“If I was running a business in Victoria I would probably close it right now.”

Westpac chief economist Bill Evans said a recent Australian Bureau of Statistics survey found a quarter of employers receiving support expected to close when government and bank support packages stopped.

“While structural change will generate new successful businesses, the early stages of the changes will see net losses of firms,” he said. “The retightening of insolvency laws will impact the more fragile businesses; some industries including tourism, travel and education will not have recovered while the shock to population growth will impact construction.”

When the safe harbour rules finish at the end of the year, workers who lose their job will also face a JobSeeker payment scheduled to return to its old rate of just $550 a fortnight. The government has committed to reviewing the amount.

Labor social services spokeswoman Linda Burney said people were “anxious about the level of support that will be available to them after December” particularly in regional Australia.

Data provided by Labor estimates there are 28 people receiving unemployment benefits for every one job vacancy in regional areas and 13 for every job in capital cities.

The situation is worse in Victoria where there are 15 people on JobSeeker for every job in Melbourne and 31 for every position in the rest of the state. This compares to 11 for each job in Sydney and 28 in regional NSW.

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