What Your Business Needs to Know About Insolvency & COVID-19

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While Australia’s collective efforts to limit the spread of coronavirus mean the country is gradually reopening and retuning to normal, the effect of shutdowns and border closures on the economy will last for some considerable time yet.

The obvious downside of necessarily strict public health measures has been a rise in business insolvency and unemployment. To address the sudden impact of the pandemic on Australian businesses, key changes to our insolvency laws were announced in March 2020. Originally scheduled to end in late September, these measures were subsequently extended to 31 December 2020.

The details of these debt relief measures are provided below for those who may be facing the possibility of insolvency, but we’ll also account for the situation where a business is dealing with an insolvent client that can’t pay its debts.

COVID-19 measures to deal with insolvency

Now in place until 31 December 2020, the changes made by the Australian Financial Security Authority (AFSA) earlier in the year include:

  • the minimum amount of debt required to activate a bankruptcy notice by a creditor against a debtor was increased from $5,000 to $20,000;
  • the amount of time an individual has to respond to a bankruptcy notice was increased from 21 days to six months;
  • people can apply for six months debt relief from creditors, an increase from the original 21-day period.

If you were issued a bankruptcy notice before 25 March 2020, you still had 21 days to comply with the bankruptcy notice.

It’s worth noting that if your business was in receipt of support payments through the Federal government’s Coronavirus Economic Response Package announced in early April 2020 (JobKeeper, etc) and you were already in bankruptcy, these are not claimable by the bankruptcy trustee as income or as an asset, regardless of whether you receive the payments before or after the date of bankruptcy.

Any support payments received before the date of bankruptcy and still in your bank account when you become bankrupt are claimable by the trustee. During the period of bankruptcy these payments are included in your after-tax income amount. If your after-tax income exceeds a certain amount, you may have to make compulsory payments.

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What to do when your business is in the position of creditor

While the extension of relief from creditors to six months can be borne by organisations the size of our national banks, if you’re a small or medium-sized business owner who supplies goods on credit it may become a major issue for your enterprise when your clients are unable to pay their bills on time due to COVID-19.

A business that supplies equipment or foodstuffs to the hospitality industry, for example, is likely to have experienced difficulty in having its invoices honoured on time as the pandemic forced the extended shutdown of cafes, restaurants, function centres and more.

In normal circumstances the supplier might engage a solicitor to act on his behalf to collect debts. They may even obtain a court judgment providing enforcement options to collect a debt from a client. The judgment would mean the supplier/creditor is able to charge interest on the debt owed by the customer at the post-judgment rate and possibly take further steps such as a wage garnishee order to enforce repayment of the amount owing.

But under the COVID-19 changes, the customer can ask for Temporary Debt Protection (TDP) through the AFSA and for a period of six months prevent the creditor from being able to use enforcement options such as a wage garnishee or the seizure and sale of its assets.

This process requires the client to file a statement about their financial affairs, including information about income, assets and debts, which is supplied to the creditor so they are aware of the debtor’s position.

In some cases the creditor and debtor may then contact each other during the six-month debt relief period, with or without legal representation or intervention by the AFSA, to try and work out a debt repayment arrangement.

Use the Personal Property Securities Register

For those supplying goods on credit terms to clients, the AFSA suggests registration on Australia’s Personal Property Securities Register (PPSR; ppsr.com.au). An agreement with the customer combined with valid registration on the PPSR can assist creditors in having their invoices paid or the goods returned in the event that the customer is unable to pay or becomes insolvent.

What a business should do during debt relief

If COVID-19 has placed your business in the position where you are, or are facing the prospect of, insolvency there are a number of steps you can take while you have relief from any action by creditors.

Discussing your situation with legal professionals who have expertise in the laws around bankruptcy, insolvency and corporate restructuring will help clarify your options. One of the options under the Bankruptcy Act 1966 may help your business see its way through to a post-pandemic existence: filing for bankruptcy; a binding debt agreement between your business and its creditors to pay a sum you can manage; or a personal insolvency agreement that allows the business to pay instalments or a lump sum to creditors.

Consult the experts

At Big Law Pty Ltd, advising businesses about insolvency, restructuring and the special COVID-19 measures still in place is a specialty area of ours. While any business is free to negotiate its own arrangements with its creditors, such as a debt agreement, taking professional advice and guidance from our experienced team will save you time, stress and money in doing so.

If you’re running a business, this is a stressful time. Uncertainty is the enemy of a successful enterprise but with our assistance, we can help you best protect your business or position it for a rebirth once our society and economy return to more normal operation.

Call us today on 1800 431 592 or email us at mail@biglaw.com.aufor an initial consultation.

At Big Law Pty Ltd, we provide holistic legal solutions to legal matters.

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