Insolvency trading laws relaxed with looming crisis ahead

29 March 2020

The Federal Government has moved to temporarily relax insolvency laws to help businesses as they deal with the economic fall-out created by the Coronavirus.

Treasurer Josh Frydenberg confirmed a number of key measures including:

  • temporarily increasing the threshold at which creditors can issue a demand on a company and/or initiate bankruptcy proceedings.
  • temporarily increasing the minimum threshold for creditors issuing a statutory demand from $2,000 to $20,000. The timeframe for a company to respond has been extended from 21 days to six months.
  • relief for directors from personal liability when the company is trading while insolvent.

BDO Australia’s National Leader for Business Restructuring, Andrew Fielding said:

“The amendments announced to the Insolvency laws are a tremendous initiative by the Government to keep Australian business moving forward in these uncertain times.

“In essence they’ve given directors at least 6 months to keep the doors open or at least tread water until the world gets back on its feet.

“The other side of these amendments is the impact on cash flow from the recovery of debtors.

“It should be noted that the serving of a statutory demand to commence the winding up process or the threat to directors of personal liability for Insolvent trading, should not be considered a debt collection process.  These provisions are in place to terminate the trading of an insolvent company.

“The reality of the current environment is that businesses have been presented with unprecedented circumstances, not envisaged by the legislators.

“The Government’s social distancing measures have resulted in the immediate closure of many businesses and a substantial reduction in business activities, which will terminate or severely reduce cash coming in.

“Creditors need to work with their clients to reach a mutually suitable arrangement in respect of outstanding debts. They also need to consider that when this event is over, they will need these clients to get their business moving again.

“The recommendation is that creditors should contact their clients directly and discuss what repayment can be agreed. It may be that they have to freeze the old account and start afresh with an agreement on different terms.

“Essentially, what we’re recommending is that supply chain participants work together to share the short term pain to navigate through the immediate crisis and to ensure collective long term viability.

“Unfortunately some businesses will have no cashflow and as such they will be unable to pay anything from current trading.  In this environment there would be little achieved by commencing winding up proceedings.”

BDO has a team of experienced business reconstruction and finance professionals who can assist you with your cashflow preparation, creditor negotiations and short term loan funding. Visit www.bdo.com.au/en-au/covid19

Read Andrew’s comments in the Sydney Morning Herald: www.smh.com.au/business/small-business/forget-toilet-paper-everybody-wants-early-payment-invoice-pain-to-continue-20200326-p54e0t.html (this content may only be available to paid subscribers only).