With Australia facing a likely shut down of non-essential services in the next 48 hours, many otherwise profitable and viable business are unfortunately facing financial distress. As part of the Federal Government's second economic stimulus package, it has been announced that the Morrison government will make temporary changes to insolvent trading laws including providing directors from temporary relief for insolvent trading.

The key measures (all to apply for the next six months only) are as follows:

  1. An increase from $2,000 to $20,000 as the minimum threshold for creditors issuing a statutory demand. Similarly, the statutory timeframe for a company to respond to a statutory demand will be extended temporarily from 21 days to six months.
  2. Relief from directors' personal liability for insolvent trading with respect to debts incurred in the ordinary course of the company's business. Any debts incurred by the company will still be payable by the company and egregious cases of dishonesty and fraud will still be subject to criminal penalties.
  3. The Treasurer will be given instrument-making power in respect of the Corporations Act 2001, to provide relief from specific obligations or to modify obligations during the crisis.

The temporary relief will hopefully keep as many viable businesses alive as possible. That said, there are of course potential unintended consequences and risks to creditors, given that there is no guarantee that you are not dealing with a company that is already insolvent. Also, unviable businesses may be kept alive and unwitting creditors may be harmed. And whilst the Government has confirmed that creditors will still have a right to enforce debt against companies or individuals through the courts, chasing a debt claim in court is expensive, timely and with current shut downs, unlikely to be a viable option at this time.

Our take-away message:

  • to creditors: manage your debtors closely (particularly for smaller amounts) and make sure you understand the impact of these new relief measures.
  • to companies and directors: you now have time to put a plan in place to assist you trade through this period. Once things are more certain, you can then make a decision (if required) about administration or liquidation.

We do not disclaim anything about this article. We're quite proud of it really.