COVID-19 – Changes to bankruptcy provisions

COVID-19 – Changes to bankruptcy provisions

Financial distress

It is anticipated that many business will suffer financial distress over the next 6 – 12 months (perhaps even over a longer period).

Government reforms

The Government has implemented some measures to reduce the risk of companies being placed into external administration by creditors and to protect individuals from bankruptcy.

  1.  The threshold for a creditor issuing a statutory demand being filed has increased from $2,000 – $20,000;
  2.  The timeframe for a debtor responding to a statutory demand has increased from 21 days to six months;
  3.  The threshold for a creditor initiating bankruptcy proceedings has increased from $5,000 to $20,000
  4.  The timeframe for a debtor responding to bankruptcy notice has increased from 21 days to six months;
  5.  If a debtor voluntary enters into bankruptcy there is a period of protection during which unsecured creditors cannot initiate legal proceedings. This period has been extended from 21 days to six months;
  6.  Directors will be relieved of their duty to prevent insolvent trading for debts incurred in the ordinary course of the business. This will relieve directors of personal liability for these debts.

The Federal Government has indicated that these measures will be temporary but will remain in place for a period of six months.

These extraordinary measures provide temporary protection for business owners but this does not mean that obligations to creditors should be ignored, as once these measures are lifted debtors will once again be exposed to claims from creditors.

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