Debt recovery is still possible despite government measures protecting debtors amid COVID-19, explains Attwood Marshall Lawyers Commercial Litigation Senior Associate and Law Society Accredited Specialist in Dispute Resolution, Charles Lethbridge.
Insolvency predicted to rise
These are precarious times for many businesses. Since the effective moratorium on bankruptcies was put in place to shield businesses from insolvency, the number of companies entering external administration has been unusually low compared to previous years. There is expected to be a tsunami of insolvencies awaiting the expiration of the moratorium at the start of next year. Only some businesses have been fortunate enough to continue trading under the lockdown restrictions with minimal impact to their business.
In March, the Morrison government placed a moratorium on insolvent trading laws including temporarily increasing the threshold at which creditors can issue a demand on a company and/or initiate bankruptcy proceedings. It gave relief for directors from personal liability when the company is trading while insolvent. The threshold at which a creditor can issue statutory demand from as low as $2000 increased to $20,000, while the threshold for the minimum amount of debt required for a creditor to initiate bankruptcy proceedings increased from $5000 to $20,000. These changes were set to expire on 25 September 2020, however as a result of industry bodies lobbying to extend the moratorium on insolvency trading laws, the Federal Government will extend these until 21 December 2020.
In addition to the temporary insolvency and bankruptcy protection put in place, new reforms to Australia’s insolvency framework will roll out on 1 January, 2021. The reforms will be the most significant changes to be made to Australia’s insolvency laws in almost 30 years.
Debt recovery and ensuring your debtors’ ledger is in shape
Even with businesses remaining afloat, there is a good chance the customers or clients of those businesses have not had the same success. This may translate to a high debtor’s ledger and in turn, a hit to the cash flow of the business.
It is imperative for businesses to forward plan to make sure they ‘weather the storm’ and ‘come out the other side’. One way to do this is to ensure that a business’ debtors ledger is accurate and kept up to date – converting invoices into cash. A business’ debtors often make up a substantial portion of a business’ assets.
While the COVID-19 safe harbour protections from insolvent trading and the moratorium on creditors being able to wind up companies and bankrupt individuals is in place, there are still steps that can be taken to recover debts to ensure a business’s health is maintained.
It is important to note that company director’s personal liabilities remain in place including:
- personal liability for personal guarantees
- director penalty notices from the ATO; and
- director’s breaches.
Steps to effectively recover debts amid the COVID-19 pandemic
There are various steps a business can take in order to maintain financial stability, including:
- Aged debtors – a well-known accounting principle is that a six-month old debtor may as well be written off as unrecoverable. Take immediate action and don’t automatically extend credit terms and consider obtaining security and personal guarantees;
- Ensure your customers understand that you don’t stand for late payments. Don’t automatically extend credit terms. Follow up all customers with outstanding payments;
- Give your customers options, for example a payment plan;
- Commence debt recovery proceedings promptly – you will have to pay a fee but chances of recovery are much greater. Litigation is often successful in recovering debts simply because of the pressure it applies.
The protections in place to protect debtors do not prevent recovery proceedings and judgments being delivered against debtors. The moratoriums delay those judgment debtors being wound up or made bankrupt, however, it is a fact that 97% of all litigated matters are settled prior to trial (judgment).
Sure, creditors may need to compromise what they are owed, but they are likely to receive money in the tin which is better than having to write a debt.
Concerns as to potential preferential payment claims being made by liquidators or bankruptcy trustees down the track should be kept in mind. It is better to have money in the bank now and deal with any claim if it indeed ever comes.
How can Attwood Marshall Lawyers help you recover debt?
If you need help with recovery of debts owed to you or you suspect your business is in financial difficulty, it is important to get professional legal advice as soon as possible.
Watch out for the warning signs which can include poor cash flow, incomplete financial records or disorganised internal accounting procedures, problems collecting debts, overdraft limits reached, overdue taxes and superannuation liabilities.
With specialised experience in all aspects of business and commercial law, our team can help guide you and your business towards a successful outcome and help ease the stress in your life.