Insolvency Relief Extension

On Sunday 6 September the Federal Government announced extensions to existing insolvency relief programs and measures that were enacted in March 2020. This new relief is in response to the ongoing COVID-19 pandemic and extends relief until 31 December 2020, replacing measures that were due to expire 25 September 2020.

The proposed regulations will bring into effect temporary measures aimed at holding off insolvency processes for businesses currently experiencing financial stress.

These measures include:

  1. Insolvent trading: directors are excused from personal liability for trading whilst insolvent for debts taken on in the ordinary course of the company’s business. Importantly this relief measure does not remove statutory or common law directors’ duties
  2. Statutory demands: increase to the threshold required to issue a statutory demand remains in place at $20,000 instead of $2000. The timelines for responses to statutory demands is 6 months instead of 21 days.

Some commentators have remarked that these changes could bring about extensive debts for tax payers by burdening the Fair Entitlements Guarantee scheme that pays out employee entitlements when the insolvent company is no longer able to. Others have remarked that the process merely moves the yardstick down the road giving rise to a class of dead but trading entities. Federal Treasurer Josh Frydenburg describes the measures as a ‘regulatory shield’ required to help businesses through this difficult stretch, which is notably more extreme in Victoria under level 4 lockdown measures.

Whichever view one holds, the effects of this shift to inhibit traditional insolvency processes is clear. There has been a large reduction in companies entering into external administration, down 51% on last year and also a large reduction in voluntary administration appointments, which are down 55% on this time last year.

The possibility of a severe New Year’s hangover for many businesses looms as a result of these changes.  One can’t help wonder, are we just delaying the inevitable?