Regulatory changes designed to assist businesses during the economic downturn have been extended until the end of the year.
In March this year, federal regulations were passed increasing the time limits for statutory demands and bankruptcy notices for payment from 21 days to six months. The increased time limits were due to expire toward the end of September but have now been extended until 31 December 2020.
According to the Australian Securities and Investments Commission, the number of companies entering external administration for the last quarter of 2020 was 1203 compared with 2095 in the last quarter in 2019, meaning a drop of approximately 43%. Similarly, the Australian Financial Security Authority has reported a drop of approximately 35.1% in personal insolvencies for the same period.
The decline in numbers suggests the Federal Government’s goal of propping up businesses and individuals has been achieved, although the long-term cost may not be known for a while yet.
Summary of the changes
The following changes were implemented in March 2020 and have been extended until 31 December 2020.
- Only individuals with eligible debts over $20,000 (an increase from $5000) will receive bankruptcy notices. They then have six months to comply with the notice (an increase from 21 days)
- Only companies with debts more than $20,000 (an increase from $2000) will receive statutory demands. They then have six months to company with the notice (an increase from 21 days).
- Safe harbour defence for directors for insolvent trading will now apply to debts incurred between 25 March 2020 and 31 December 2020 provided they are in the ‘ordinary course of the company’s business’.
Why the Federal government implemented the changes to bankruptcy laws
The Federal government says it implemented the changes to bankruptcy laws to allows viable businesses temporary relief from financial stress. It wanted to make sure businesses had a “safety net” to make sure that when the coronavirus crisis passed, they could resume normal business operations.
The changes essentially help lessen the threat of legal actions that could force them into early insolvency. However, the extension from September to the end of the year has face mixed reviews among the legal community.
What we think
Extending the regulations only stands to delay the inevitable for those businesses and individuals who were already in financial distress.
The extension is simply allowing some businesses and individuals to continue trading temporarily, when they may be at a point already where they cannot recover, whether now or at the end of the year.
Extending the six months for compliance with statutory demands means some businesses that are struggling already may be tempted to continue trading and incur even further debt.
It is important for business owners and individuals to understand their financial position and seek specialist advice if they are in financial distress, and not just rely on a temporary lifeline to put off the inevitable.
Even if creditors are prevented from taking steps, there are voluntary insolvency processes that are available to distressed businesses and individuals that may be more appropriate to than continuing to trade and incur further debt.
Advice taken now may avoid making a bad situation worse.
How we can help you
MBA Lawyers works closely with businesses, individuals and their financial advisers. If you are concerned about your position and need legal assistance in relation to insolvency options, we are available to meet with you for a free initial consultation.