Temporary and permanent changes to insolvency laws in Australia

After the declaration of a world-wide pandemic in early 2020, the Federal Government in Australia introduced a range of stimulus measures to help affected businesses, workers, and the broader community. These included Jobkeeper wage subsidies for staff of entities whose businesses were adversely affected by the pandemic. There were also several debt initiatives announced by the Federal Government.

Jobkeeper comes to an end at the end of March 2021, and it is likely that there will be an increase in corporate and personal insolvencies. Whilst Australia might out-perform other regions in the world in 2021, economists predict that Australia’s business insolvencies will be 10% higher in 2021 compared to 2019 (Euler Hermes Global Insolvency Index).

There have been temporary changes to the creditors’ statutory demand process and insolvent trading laws have been extended to 31 December 2020. The rules were originally introduced in March 2020 and were due to expire on 25 September 2020. However, they were extended until 31 December 2020.

The temporary pandemic safe harbour defence for directors from liability for insolvent trading continued to apply to debts incurred after 25 September 2020 until 31 December 2020. These debts must still have been incurred after 25 March 2020 as long as they were in the “ordinary course of the company’s business”.

The use of statutory demands and bankruptcy notices (as a prelude to court winding-up and personal bankruptcies) were restricted. In each case, the monetary thresholds were increased and the time for compliance extended to six months. This regime was extended past 25 September 2020 to demands and notices issued before 31 December 2020.

Undoubtedly these changes have helped avoid a potentially unprecedented wave of financial distress and corporate collapses. This extension allowed directors additional time to take advice and achieve a better outcome for their companies than the immediate appointment of a liquidator or a voluntary administrator under the general safe harbour defence (section 588GA Corporations Act 2001) which continued to apply unchanged.

The Federal Government also implemented further changes to Australia’s insolvency laws which came into effect on 1 January 2021. Under the new structure, based upon the United States Chapter 11 Bankruptcy Process, small businesses with a total debt of less than $1 million owing to creditors will be able to retain control of their business and plan their recovery independently without being handed over to administrators.

The business must appoint a properly qualified insolvency adviser to assist in the restructuring. After calling in a small business insolvency adviser, a business will then have 20 days to propose a way to trade out of debt to creditors. Creditors will have a further 15 days to vote on the proposed plan, and if approved, will be put into action.

Creditors will still be able to reject proposals given by small businesses and their advisers which will result in the existing process of external administrators taking control of the business. To protect the workers of the small businesses, any entitlements that are due to workers must be paid out in full before a plan is submitted to creditors. To prevent misuse of the system, small businesses will not be able to use the new insolvency process more than once every seven years. When this new small business initiative was announced on 24 September 2020, there were over 1 million businesses and companies being kept afloat with Jobkeeper payments soon to finish at the end of March 2021.

It remains to be seen what the effect of these various changes to insolvency laws (some temporary and some permanent) will have upon Australian businesses when Jobkeeper payments cease.

For more information contact Jon Broadley

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