Temporary Changes to Bankruptcies and Liquidations – The Federal Government’s Coronavirus Response

Below is an outline of the changes made to the insolvency rules around Creditor’s Statutory Demands and Bankruptcy Notices. These changes apply whether or not a judgment has been obtained.

What are the changes?

The Government has brought in immediate temporary measures to:

  • Increase the threshold at which creditors can issue a Statutory Demand on a company from $2,000 to $20,000;
  • Increase the threshold at which creditors can institute bankruptcy proceedings against an individual from $5,000 to $20,000;
  • Increase the time that companies and individuals have to comply with a Statutory Demand or a Bankruptcy Notice respectively from 21 days to 6 months;
  • Extend the period of protection that a debtor receives after making a declaration of intention to present a debtor’s petition (from 21 days to 6 months);
  • Provide some relief for directors from personal liability for trading while insolvent.
Federal Governement's Response to Coronavirus

Note that these changes are not permanent. They are designed to deal with the immediate impact of the coronavirus and at present are limited to a 6-month period from 25 March 2020 to 25 September 2020.

What about current matters?

The changes do not affect the validity of Statutory Demands served prior to 25 March 2020. Under those circumstances, the old rules apply and non-compliance within a 21-day period will permit a winding up application to be filed and determined.

The position is similar with respect to Bankruptcy Notices already served. The new rules will not act retrospectively, and a debtor will commit an act of bankruptcy if they do not comply with the current notice. Note however that the Courts are currently experiencing some delays in progressing matters.

Our views on the changes

For current matters where a Statutory Demand or Bankruptcy Notice has been served, we see no reason to delay proceeding, subject to the usual cost/benefit analysis.

  • Almost all current matters will pre-date the present coronavirus disruption (sometimes by months or even years). Failing to proceed with those matters now may provide debtors with an opportunity to simply do nothing or, worse, take steps to the disadvantage of creditors, such as dissipating assets or raising new reasons not to pay, despite having an ability to do so. Obviously, this needs to be assessed on a case by case basis depending on the circumstances.
  • The issue of a Statutory Demand or Bankruptcy Notice may also prompt a debtor to offer a payment arrangement, a result which obviously assists cash flow even if it does not get the debt paid immediately in full.

For new matters, an arrangement may also assist in cash flow but clients should be particularly careful of the terms of that arrangement. A Statutory Demand or Bankruptcy Notice will be considered “satisfied” if a payment arrangement is entered into. If that arrangement is then breached, the creditor would need to reissue the Statutory Demand or Bankruptcy Notice and the new 6-month period to comply begins again. There are two ways to deal with this:

  • The creditor should make it absolutely clear that if a payment arrangement is agreed upon and then breached, no new arrangement will be entered into and the full amount will be required to be paid or the client will proceed as soon as the opportunity arises;
  • The creditor can refuse to enter into an arrangement and demand payment in full, but also acknowledge that no further steps under the Demand or Notice can be taken until 25 September 2020. The debtor can be encouraged to make whatever payments they can afford prior to that time, noting that at the end of such period, the creditor may proceed if the debt is not paid in full or substantially paid down.

Creditors should also consider alternative recovery methods on a case by case basis, such as the issue of writs of execution over goods or property and garnishee orders over wages, bank accounts or against people who owe the debtor money. Examination of the debtor through the Court may also prove effective in getting your debt paid before others. 

Finally, Statutory Demands and Bankruptcy Notices are undoubtedly a useful tool. While the changes do dilute their effectiveness for the time being, they are still worthwhile considering as an option, even now. It will be important for our clients to not only protect their businesses through the current tumultuous times but place their businesses in the best possible position to succeed once the storm passes, and it will.

For advice on anything to do with debt recovery, call AMPAC on 1300 426 722 or email us at sales@4ampac.com.au

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