Can I collect my debts under the new COVID-19 insolvency changes?

Do the temporary changes to insolvency law mean that you won’t get paid?

Sort of. You should get paid eventually (if the debtor makes it through these challenging times), but your options to force a company or individual into insolvency will be delayed.

TIP: With these changes, it is now supercritical to properly assess the solvency of the people you propose to deal with. If you have any doubts, ask for payment upfront.

The new limit and timeframe for statutory demands

As part of the Government’s economic response to COVID-19, directors have been given a temporary six-month respite from:

  • Any personal liability for trading while insolvent, provided the debt is incurred in the ordinary course of business (starting from 25 March 2020); and
  • The usual strict 21-day time frame in which their company must respond to a statutory demand.

A company is deemed to be insolvent if it fails to pay a creditor who has issued a formal statutory demand, unless that demand is set aside by a court.  Prior to the new measures taking effect, a creditor could issue a statutory demand on a company if the company owed the creditor more than $2,000 (under s 459E of the Corporations Act 2001). Under the new temporary regime, a statutory demand can only be issued if the amount owed is $20,000 or more.

Previously a company had 21 days to respond to a statutory demand, and failure to do so created a presumption that the company was insolvent.  This then meant an external administrator could be appointed. The statutory timeframe for a company to respond to a statutory demand has now been temporarily increased to six months.

These two changes mean the appointment of an external administrator is stayed for at least 6 months for debts under $20,000.

The new regime for directors and insolvent trading

Company directors are under a duty to prevent insolvent trading by their company. This means they must prevent the company from incurring a debt when the director should reasonably know that the company is not able to meet its debts as and when they fall due.

The temporary changes effectively relieve a director from their obligation to prevent their companies from continuing to trade while insolvent for 6 months from 25 March 2020.

This allows directors to operate their business and continue to incur debts – at a time when the director is aware that the company is not currently able to meets its debts, as and when they fall due. In doing this, the director will not be liable for the debts incurred during this limited period.

TIP: This puts the onus squarely back on people trading with companies to ensure that the company is solvent and will be able to pay. In fact, requesting payment up-front, or using the PPSR regime to withhold transfer of title, become critical tools.

The new limit and timeframe for bankruptcies

Prior to the temporary bankruptcy laws, a creditor could bring bankruptcy proceedings against an individual debtor if the debtor owed a debt of at least $5,000.  If that individual failed to respond to a bankruptcy notice within 21 days (i.e. to pay or formally dispute the debt), they were deemed to be insolvent. This would then allow the creditor to seek the appointment of an external trustee in bankruptcy.

The temporary changes to the law mean:

  • A creditor can only initiate bankruptcy proceedings if the debt is at least $20,000; and
  • Individual debtors have 6 months from the date of service to respond to the bankruptcy notice; and
  • If an individual debtor applies for voluntary bankruptcy, unsecured creditors cannot take further action against them for 6 months (as opposed to the usual 21-days).

It is the last of these measures that is going to provide real relief for individual debtors under a financial strain, as they can take positive action to buy themselves a stay of execution.

So, can businesses still take measures to get paid?

Yes.

The changes to our insolvency and bankruptcy laws are not a ‘get out of gaol free card’.  They are designed to give individuals and businesses the opportunity to continue during the COVID-19 outbreak, subject to government shutdowns or other limitation of services.  The changes are temporary.

During the six-month relief period, creditors can still take action to enforce their debts in the usual manner using both final notices and court action to a judgement debt, and then rely on the enforcement regime available (i.e. attachment of debts or sale of assets by the sheriff).

It is also possible to force a winding up of the debtor company using other methods, such as winding up by the court where it is demonstrated that the company is unable to pay its debts (other than using a stat demand), on just and equitable grounds, or where winding up is sought by ASIC.

What to do now?

Cash flow is critical to the survival of your business at the best of times.  If you have creditors, do not delay in initiating debt collection proceedings or exploring your other options.  We have an experienced team of debt collection and insolvency lawyers ready to protect your position. Call us on 1300 654 590.

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We want to be part of your team over the long term. We'll achieve this by sticking closely to the following principles:

  • We'll listen carefully to understand what you want to achieve. Then we'll thoroughly explain our advice and step you through the documents. You can be sure you'll know the full consequences.
  • Our lawyers work as a team, so someone will always be available to answer your questions, or point you in the right direction. You will also benefit from a range of perspectives and experience.
  • One of our key goals is to pass on as much knowledge as we can, so you can make your own informed decisions. We want to make you truly independent.
  • We only do what we're good at. You can be confident that we know what we're doing and won't pass on the cost of our learning.
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We measure our success on how efficiently we have facilitated your objectives, enhanced your relationships, and reduced the level of stress for all involved.

If we sound like people you can work with, call us now on 1300 654 590 and speak directly with a great lawyer.

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