After a three month extension on 25 September 2020, the temporary changes to Australian insolvency laws that were introduced in March 2020 as part of the economic response to the COVID-19 pandemic, have now ceased as of 1 January 2021.
The temporary changes to the laws, included the insertion of COVID-19 safe harbour defence under section 588GAAA of the Corporations Act 2001 (Cth), which precluded director liability for insolvent trading for debts that were incurred after 25 March 2020 and incurred in the ordinary course of the company’s business.
Other key changes included:
1.The debt threshold for creditors to petition bankruptcy being increased from $5,000 to $20,000;
2.The debt threshold for creditors to issue a statutory demand being increased from $2,000 to $20,000;
3.Greater time being afforded to a debtor to respond to a bankruptcy notice or statutory demand (increased to six months); and
4.A six month period for temporary debt protection from creditors, as opposed to the usual 21 days relief granted to debtors.
As of 1 January 2021
The above changes have now ceased and a debtor’s time to respond to a bankruptcy notice, and the temporary debt protection period, have both reduced from six months to 21 days.
The statutory demand minimum has returned to the ordinary $2,000.
The bankruptcy threshold has decreased from $20,000 (temporary threshold), but as a consequence of a legislative amendment that has now been made, the minimum amount to trigger bankruptcy has been adjusted from the $5,000 threshold (in force prior to the temporary changes) to $10,000.
What this means for Directors
With the end of the temporary changes in the law, directors should be ever-cognisant of their duties as directors (read more about directors duties here.
Whilst the previous change provided some relief for personal director liability for insolvent trading, the removal of this provision means that directors may again be held personally liable for debts incurred by the company whilst insolvent, or a debt incurred that causes the company to become insolvent. In this regard there are also related criminal and civil penalty provisions of the Corporations Act 2001 (Cth) that apply when this duty to prevent insolvent trading is breached.
Directors can still utilise the general safe harbour defence introduced in 2017, pursuant to Corporations Act 2001 (Cth) section 588GA. Section 588GA permits directors who suspect the company may become or is insolvent, to (where appropriate) take a course of action that is ‘reasonably likely to lead to a better outcome for the company’ as opposed to the immediate appointment of an administrator or liquidator.
As always, directors should ensure they are informed and remain up to date with the company’s financial position, seeking professional advice where necessary, to avoid any breach of their duties.
What this means for Creditors
Creditors, individual and company debtors will now only have the previous 21 days in which to respond to a bankruptcy notice and are only afforded the 21 day temporary debt protection period.
The ordinary threshold for issuing a statutory demand ($2,000) is again in force, and if after issuing the statutory demand the company fails to respond within the 21 day period, the company is presumed insolvent and you may apply to the court for the appointment of a liquidator to wind the company up.
Unlike previously, a debt owed to you by an individual must now be at least $10,000 in order to petition bankruptcy against a debtor.
The Next Step
Should you require advice in relation to the above, we would be pleased to hear from you.
Glaser Lawyers offers all clients a complimentary and obligation free consultation.
We look forward to working with you to achieve your aims and protect your interests.
Please call 1300 000 770 or email admin@glaser.net.au to make your appointment.
