Flatten the Curve of Insolvencies
The Australian government will place a freeze on insolvent trading laws to help businesses manage the sudden economic shock wave of the coronavirus and delay an anticipated avalanche of business failures.
Key measures will include temporarily increasing the threshold at which creditors can issue a demand on a company and/or initiate bankruptcy proceedings.
The government will boost the threshold at which a creditor can issue a statutory demand from as low as $2000 today to $20,000, while the threshold for the minimum amount of debt required for a creditor to initiate bankruptcy proceedings will increase from its current level of $5000 to $20,000. Both actions will last for six months.
The time companies have to respond to such demands they receive will also be increased from 21 days to six months.
Furthermore, there will be relief for directors from personal liability when the company is trading while insolvent.
Directors will be temporarily relieved of their duty to prevent insolvent trading for any debts incurred in the ordinary course of the company’s business. This change will also apply for six months.
“Now is the time for more flexibility in insolvency and bankruptcy laws to keep these businesses alive and to trade through this period,” Treasurer Josh Frydenberg said.
Mr Frydenberg described the relief to director’s personal liability as “vital to help companies get through this period”.
Prime Minister Scott Morrison said the new rules were to “make sure more and more Australians get through this to the other side so they can bounce back strongly when it is over”.
The changes will not come at any financial cost to the government’s budget position.
EY insolvency partner Justin Walsh said the changes to the insolvency rules were desperately needed.
“I am a strong supporter of this. I have spent the entire weekend going from teleconference to teleconference planning insolvencies. There is an avalanche of insolvencies about to hit this country.
“What I think the government is doing with insolvency is the same thing they are doing with the virus, which is to flatten the curve of insolvencies.
“This will allow directors to work through the impact without having to take on unmanageable personal risk and will ultimately see more Australian businesses survive.
“I suspect there will be significant tightening in credit, because there is no guarantee that you are not going to be dealing with a company that is already insolvent. That would be an unintended consequence.”
Australian Restructuring Insolvency & Turnaround Association chief executive John Winter said such laws enabling unviable businesses to stay alive would have a “snowball” effect on their small business suppliers, who would “cop it in the neck”.
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