The Government has stepped in to prevent a wave of insolvencies when the COVID-19 support measures run their course in December 2020.
Temporary insolvency and bankruptcy protections are in place until 31 December 2020 to enable businesses to trade through the pandemic.
- A temporary increase in the threshold at which creditors can issue a statutory demand on a company (from $2,000 to $20,000) and the time companies have to respond to statutory demands they receive (21 days to 6 months);
- A temporary increase in the threshold for a creditor to initiate bankruptcy proceedings (from $5,000 to $20,000), an increase in the time period for debtors to respond to a bankruptcy notice (21 days to 6 months), and extending the period of protection a debtor receives after making a declaration of intention to present a debtor’s petition;
- Temporary relief for directors from any personal liability for trading while insolvent; and
- Flexibility in the Corporations Act 2001 to provide targeted relief for companies from provisions of the Act to deal with unforeseen events that arise as a result of the Coronavirus health crisis.
Between March and July 2020, there was a 46% decrease in the number of companies that have gone into external administration compared to the same period in 2019.
Anticipating a wave of insolvencies in early 2021, the Government has moved to streamline insolvency laws to enable small business to either restructure or efficiently wind up.
- A new formal debt restructuring process for companies that will enable a business to keep trading under the control of its owners while a debt restructuring plan is developed and voted on by creditors.
- A new, simplified liquidation pathway for small businesses to allow faster and lower-cost liquidation.
The measures will be available to businesses with liabilities of less than $1 million. You can find further information on the proposed insolvency reforms here.
In Australia, the insolvency laws currently do not differentiate between large and small businesses. Everyone goes through a similar process. For small business, the complexity and the cost of adhering to the current insolvency system often leaves little for creditors, makes it difficult to restructure, and places control of the business in the hands of an administrator. These reforms should help simplify the process.
What if I think I might go insolvent?
To ensure your business’s survival, closely monitor your credit situation. Regularly check your debt position, invoice promptly and follow up on any old debts.
It could also be time to review your credit policy and think about whether your credit conditions remain appropriate. Failing businesses often continue racking up debt, putting their suppliers at risk of collapse from unrecoverable debts when they are eventually wound up.
From 1 January 2020, the government plans to introduce a new streamlined insolvency framework featuring a ‘debtor in possession’ model, which will allow small businesses to keep trading under the control of their owners while a debt restructuring plan is developed.
When and if these plans are legislated, creditors will need to closely monitor their debtors to ensure they are forewarned of any potential problems.
Talk to your lenders
If you are experiencing financial difficulties, now is the time to get on the front foot.
The major banks have already begun contacting business customers who took advantage of the repayment deferral to discuss whether they will be granted an extension.
If your business has not been repaying its loan, you need a plan. This could include restructuring or extending the length of your loan, converting it to interest-only payments for a period, or consolidating your debt.
We can help you develop a strategy to work through your situation or help create a restructuring plan. The key is to talk to us early.
Facing up to insolvency
Even with a more flexible insolvency framework, it will be essential to regularly monitor your solvency, so you don’t accidentally trade while insolvent.
If you find yourself at risk of insolvency, it is vital to obtain professional advice quickly, as the penalties and personal liability could cost you both your business and your private assets.
While the proposed insolvency framework will give struggling small business owners a little more breathing room, it only provides a relatively short 20 business day period for a small business restructuring practitioner to develop a restructuring plan.
Creditors then have 15 business days to vote on the plan.
Failing to act straight away could harm your business, your creditors and your reputation, so talk to us early about your options.
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This article was written by a third party.