Temporary insolvency protections extended

By Scott Butler and David Dickens

The Federal Government today announced the temporary six-month moratorium from insolvent trading liability has been extended until 31 December 2020. Temporary changes to statutory demands and bankruptcy notices requiring a debt of $20,000 and allowing six months to pay the amount demanded will also be extended to this date. These measures had otherwise been due to expire later this month.

The announcement gives much-needed clarity and certainty for the remainder of 2020.

It raises important issues though for directors, companies in distress and creditors, as well as the possibility of further measures and reform to Australia’s restructuring laws.

Our observations

COVID-19 has been significantly affecting the Australian economy for six months now.

Increasingly, the benefits and detriments of continuing the temporary insolvency measures must be carefully weighed up.

Companies in distress

For companies in distress, the measures reduce the insolvent trading claim risk for directors and also allow companies to unilaterally avoid paying creditors (due to statutory demands having a six-month expiry period). This allows companies to keep trading and adjust to the new environment notwithstanding an inability to pay creditors.

It also allows ‘zombie companies’ that were not viable despite COVID-19, and have no prospect of surviving once the measures are removed, to remain in business and to potentially incur further debts which they will never be able to pay.

The lead up to Christmas and Boxing Day sales is a critical period for many retailers. Often, retailers make decisions based on their performance over this period. However, the expiry date of the extension (31 December 2020) means that retailers and other companies will need to effectively make decisions about their future in December.

Creditors

Presently, creditors have little leverage (other than to stop supply) to press for payment by customers. The ability to efficiently collect debts is a critical mechanism in any country’s laws and the continued inability to collect debts risks deteriorating the position of suppliers otherwise well-positioned to withstand the COVID environment.

What’s next?

The Federal Government has proposed a number of additional measures, such as new restructuring tools for micro and small businesses. We expect the Federal Government will closely look at new reforms.

To discuss this topic further, please contact a member of our Turnaround & Corporate Renewal or Insolvency teams.