Federal Treasurer Josh Frydenberg announced on Sunday that a “regulatory shield” would be available for businesses finding themselves in implacable financial difficulties following the decision to shut down all non-essential services.1

This, in addition to the effects flowing from travel bans and increased levels of self-isolation, has prompted the Australian Government to develop a safety net to ensure that businesses can continue trading once the Coronavirus pandemic passes and normal activity resumes.

Key Features:2

  • A temporary increase in the threshold at which creditors can issue a statutory demand on a company;
  • A temporary increase in the time companies have to respond to statutory demands they receive;
  • A temporary increase in the threshold for a creditor to initiate bankruptcy proceedings;
  • A temporary increase in the time period for debtors to respond to a bankruptcy notice;
  • A temporary increase in the period of protection a debtor receives after making a declaration of intention to present a debtor’s petition;
  • Temporary relief for directors from any personal liability for trading while insolvent; and
  • Temporary flexibility in the Corporations Act 2001 to provide targeted relief for companies from provisions of the Act to deal with unforeseen events that arise as a result of the crisis.

Statutory demand thresholds temporarily increased

A statutory demand is a document issued to a debtor company requiring it to pay a debt owed. More often than not, a company failing to pay the creditor of a statutory demand will find itself facing winding-up proceedings.

In a bid to relieve pressure for businesses, the Government has temporarily increased the minimum financial threshold under the Corporations Act 2001.

A creditor wanting to issue a statutory demand under the new temporary provisions may only do so for debts of $20,000 or more (increased from the previous threshold of $2,000).
Those facing claims will also have an extended period of six months to respond to the statutory demand (increased from the previous period of 21 days).

Temporary increases in statutory demand thresholds will apply for 6 months.

For further information on statutory demands see our quick guide for contractors and builders here.

Bankruptcy thresholds temporarily increased

Similar to the above, but in a personal capacity, the Government has increased thresholds relating to the personal insolvency system under the Bankruptcy Act 1966.

The minimum amount of debt required for a creditor to initiate bankruptcy proceedings in most cases will increase from $5,000 to $20,000.
Further, the time a debtor has to respond to a bankruptcy notice will also increase from a period of 21 days to a period of 6 months.

In cases of voluntary bankruptcy, an individual may decide to lodge a declaration of intention to present a debtor’s petition (a “DOI”).
This mechanism typically provides a 21-day protection period where unsecured creditors (including sheriffs) can’t take further action to recover their debts.

The Government has also temporarily increased this period of protection from 21 days to 6 months.

Temporary increases in bankruptcy thresholds will apply for 6 months.

Personal relief for directors trading whilst insolvent

Trading whilst insolvent is a serious issue which can carry extensive penalties for the company’s directors including personal liability for company debts and potential disqualification from being a director for up to 15 years.

To ensure that companies are able to trade through these testing times, the Government has temporarily relaxed its stance. Directors are no longer under a duty to prevent insolvent trading with respect to any debts incurred in the ordinary course of the company’s business (albeit, temporarily). This means that directors will be relieved of any personal liability they would otherwise face as a consequence of insolvent trading.

The aim is that companies will be able to maintain their customer base and quickly resume normal operations once the crisis has passed, whilst simultaneously incurring debt. When economic conditions improve, the company can pay back the debt incurred.

Whilst this may provide relief in some cases, it is by no means an outright solution. Companies will remain liable for all debts they incur and dishonest or fraudulent actions will be subject to severe penalties including criminal prosecution.

Temporary relief for directors trading whilst insolvent will apply for 6 months.

Temporary Flexibility under the Corporations Act

The Treasurer has been granted temporary powers to amend provisions of the Corporations Act 2001 in order to adjust or remove legal and regulatory requirements which would otherwise negatively impact the survival rate of Australian companies. Any amendment to the Act will be enforced for up to six months from the date it is made.

The ATO have also advised that they will tailor solutions for owners and directors of struggling businesses depending on their individual circumstances. It is likely that this will include temporarily reducing payments/deferrals and withholding enforcement actions such as Director Penalty Notices and wind-ups.

To see if any of the temporary changes to insolvency legislation and procedures can benefit you or your business, please get in touch with the Morrissey Law + Advisory team.

[1] Jennifer Duke, ‘Regulatory Shield’: No more business-as-usual rules amid coronavirus, The Sydney Morning Herald, accessed online (23 March 2020), here.
[2] Department of the Treasury 2020, Fact Sheet: Temporary relief for financially distressed businesses, accessed online (23 March 2020), here.

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