The temporary insolvency relief measures for businesses implemented by the Federal Government to protect companies, directors and individuals financially impacted by the pandemic, expired on 31 December 2020. With COVID-19 and the economic impact of the pandemic still looming, Attwood Marshall Lawyers Commercial Litigation Senior Associate and Law Society Accredited Specialist in Dispute Resolution, Charles Lethbridge, discusses insolvent trading laws, the up-to-date situation with creditor’s statutory demands and bankruptcy notices, and what business owners need to know in 2021.
What were the temporary insolvency relief measures?
The temporary insolvency relief measures which were introduced in March 2020 increased the monetary threshold that people or businesses owed money could issue a creditor’s statutory demand on a company (from 2k to 20k) and the time companies had to respond to statutory demands they received (21 days to 6 months). The monetary threshold that creditors could issue a bankruptcy notice (5k to 20k) and the time individuals had to respond to a bankruptcy notice (21 days to 6 months) were also implemented.
Additional measures to provide temporary relief from company directors personal liability for a company trading while insolvent were also activated.
Were the temporary insolvency relief measures for businesses shielding the inevitable?
ASIC data on insolvency statistics showed the number of companies going into administration during the pandemic hit record lows when compared to the previous year, despite lockdown directives.
With an understanding that the temporary measures would only assist businesses for so long, experts expected that insolvencies would skyrocket in 2021 once the financial relief concluded. However, some experts now believe that the number of insolvencies may not be as dramatic as first predicted. Despite the change in prediction, it is expected that 2021 will still bring plenty of hardship and heartbreak for many businesses as COVID-19 continues to deliver financial uncertainty.
Directors Protection from Insolvent Trading in 2021
Company directors take note; if you continue to trade past the 31 December 2020 deadline, you will no longer have protection against insolvent trading nor will you have any retrospective protection.
To be clear, directors trading an insolvent company past 31 December 2020 will be exposed to the Federal Insolvent Trading Laws including throughout any period the company was insolvent during March 2020 to December 2020, if the company later ends up in liquidation.
Directors will only be afforded protection if they appointed an external administrator to the company prior to 31 December 2020.
Changes to Bankruptcy Notices and Statutory Demand Procedures from 1 January 2021
The time frame to respond to bankruptcy notices has returned to 21 days (which was previously set to 6 months under the temporary relief provisions).
The threshold amount to issue a bankruptcy notice has reduced from the temporary $20,000 to $10,000, whereas prior to the temporary relief measures, it was $5,000.
It appears the new $10,000 threshold will remain permanently. That means that a creditor can only issue a bankruptcy notice in respect of a judgment debt if it is equal to or exceeds $10,000. This has afforded ongoing protection for debtors.
In relation to creditor’s statutory demands, the time frame to respond has returned to 21 days (which was previously set to 6 months under the temporary relief provisions). The threshold amount to issue a creditor’s statutory demand has reduced from $20,000 to $2000.
Are you concerned about your business?
The temporary relief measures in 2020 successfully stopped creditors in their tracks from issuing statutory demands and bankruptcy notices to struggling businesses. This was mainly due to the prohibitions which the relief measures imposed on creditors. With those burdens now removed, our team have received a record number of enquiries in the new year. Creditors are taking full advantage of the ‘return to normal’ and pursuing debts. Our experienced Commercial Litigation team are geared up to help you on either side of the equation now that the restrictions have been lifted.
We take a tactical approach to assist businesses faced with these difficult matters. With a history spanning more than 7 decades assisting individuals and small to medium sized businesses since World War II, we have a deep understanding of the processes and ramifications associated with creditor’s statutory demands and bankruptcy notices.
Conversely, in conjunction with insolvency practitioners who operate in line with our core values, our lawyers assist clients on the verge of liquidation or bankruptcy. Our Commercial Litigation team are driven to make the process as stress-free, affordable and as liberating as possible. If you have received a creditor’s statutory demand or a bankruptcy notice you should seek legal advice immediately.