Coronavirus Support: Changes to Insolvency and Bankruptcy Laws
On 25 March 2020 there were changes made in the Coronavirus Economic Response Package Omnibus Act 2020 (Cth) to the Commonwealth bankruptcy and insolvency law. These reforms will be in place until 25 September 2020.
These changes are aimed at providing financial support and relief to assist individuals who were facing economic hardship due to the COVID-19 pandemic. The changes have provided a safety net for individuals and companies who are managing debt and have been implemented in conjunction with the Governments economic stimulus packages.
Changes to Bankruptcy Laws
Typically, a creditor can initiate bankruptcy proceedings against an individual who owes an amount greater than $5,000.00. The individual has 21 days to comply with the bankruptcy notice. The temporary debt protection period available to those in financial difficulty has now been extended to a period of six months where an individual is protected against recovery action against unsecured creditors.
The debt threshold required for a creditor to apply for a bankruptcy notice against a debtor has been increased from $5,000.00 to $20,000.00. In addition to this, the timeframe for a debtor to respond to a bankruptcy notice has now been increased from 21 days to six months. Therefore, creditors are unable to commence bankruptcy proceedings until the six-month period has passed.
It is important to note that individuals who are currently in bankruptcy cannot claim economic support payments or have the bankruptcy trustee claim these payments as income or as an asset, regardless of whether these payments are received before or after the date of bankruptcy.
However, COVID-19 supplement packages are claimable by the Trustee if they are received prior to the date of bankruptcy and remain in the bankrupt’s bank account which they become bankrupt. During bankruptcy these payments are included in the after-tax income amount.
Changes to Insolvency Laws
The creditors statutory demand is a mechanism established pursuant to the Corporations Act 2001 which potentially makes a company insolvency if they do not pay the creditor’s debt within 21 days of the issue of the demand. However, the time to comply with statutory demands has been extended from 21 days to six months. Like the bankruptcy laws, it is important to note that the changes do not protect directors for debts incurred prior to the commencement of these laws on 25 March 2020. Further to this, there has been an increase in the threshold for issuing a creditors statutory demand from $2,000.00 to $20,000.00.
Changes to insolvency law also include eliminating action against directors from personal liability for trading whilst insolvent in relation to debts incurred in the ordinary course of business during COVID-19. However, directors must still be aware that this does not relieve them from criminal penalties if debts are incurred dishonestly or fraudulently during the period. The impacts of COVID-19 may also result in some businesses being unable to comply with their obligations and requirements under the Corporations Act. During this time, The Australian Securities and Investment Commission (ASIC) has the power to offer relief for some provisions or to not take action for failing to comply with provisions of the Corporations Act.
Further to these changes to insolvency law, the Australian Taxation office will also tailor solutions for business owners or directors that are struggling during coronavirus. This includes temporary reduction of payments or withholding enforcement actions against Director Penalty Notices. For businesses and individuals struggling during the COVID-19 pandemic, it is important to consider these changes to insolvency and bankruptcy laws and available support during these unprecedent times.