Good, Bad or Ugly? Extension to Insolvent Trading and Bankruptcy Protections

By Angela Haynes, KPMG Greater Western Sydney

The Federal Government has announced an extension of its temporary insolvency and bankruptcy protections until 31 December 2020. The protections are intended to provide regulatory relief for COVID-19-affected businesses by lessening the threat of actions that could push businesses into insolvency and external administration. The announcement gives much-needed clarity and certainty for the remainder of 2020.

It raises important issues though for directors, companies in distress and creditors, as well as the possibility of further measures and reform to Australia’s restructuring laws.

The measures that are extended until 31 December 2020 are:

  1. 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 (from 21 days to 6 months);
  2. A temporary increase in the threshold for a creditor to initiate bankruptcy proceedings (from $5,000 to $20,000), an increase in the time for debtors to respond to a bankruptcy notice (from 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 (from 21 days to 6 months);
  3. Temporary relief for directors from any personal liability for trading while insolvent.

Not all are in agreement on the matter. Will the extensions have a good, bad or ugly effect on business?

The Australian Institute of Company Directors (AICD) suggest that the relief, which will now last until the end of the year, gives corporations greater comfort in managing the impacts of COVID-19, without the pressure to move to formal insolvency or wind-up immediately.

They highlight that it is important for directors to remember that this is in no way a ‘free pass’; they must continue to assess the ongoing financial liability of their organisations, as well as the impact of incurring further debts. However, fundamentally, the legislation will allow many viable organisations to come out the other side of this unprecedented disruption.

The Australian Institute of Credit Management (AICM) is of the view that the measures increase the risk of preference claim demands and is advocating for a corresponding moratorium to protect payments received from customers who may be insolvent during this period, from future preference claims by liquidators.

According to the AICM, a way forward may be a moratorium for preference payments that would enable credit providers to effectively support customers with payment arrangements without fear of having to return payments and shorten the duration of the impacts as businesses could be exposed to this risk until 1 January 2024 and beyond.

In their latest thinking, Scott Butler and David Dickens of Hall and Wilcox Lawyers suggest that the extension allows ‘zombie companies’ that were not viable despite COVID-19, and have no prospect of surviving once the measures are removed, to remain in business and to potentially incur further debts which they will never be able to pay.

In terms of the date, the lead up to Christmas and Boxing Day sales is a critical period for many retailers with business continuity decisions made based on their performance over this period. The expiry date of the extension (31 December 2020) means that retailers and other companies will need to effectively make decisions about their future in December.

What can businesses do to prepare for the end of the insolvent trading moratorium?

In a COVID-19 Blog, James Ferguson of Coleman Greig Lawyers suggest businesses should use the current temporary reforms to assess their situation and make a plan so that they can survive and thrive:

  1. Talk to your accountant. Business owners with cash flow problems often wait until it’s too late (for example: when they are served with a statutory demand or wind up application) before they reach out for help and, in some instances, this can make the situation much harder to navigate;
  2. Be realistic about your financial situation and the way in which you do business.  COVID-19 has forced many industries to be flexible and adapt to the changing demands and restrictions. If there are aspects of your business that are no longer sustainable, then now could be a perfect opportunity to consider whether to continue those aspects in the short or long term and to restructure their business accordingly;
  3. If a business is surviving only because of the Government’s relief packages, then make a plan with now for how to get on top of debts over the coming months. It is important that a business get on top of their finances early and make a plan that will be sustainable for their business. For example, one approach may be to be transparent with creditors and see whether a payment arrangement can be reached for any outstanding debts that will balance obligations with the ongoing trading relationship.

At KPMG Greater Western Sydney we are all too aware of the predicted spike of bankruptcy and insolvency applications once the insolvency laws return to normal. Businesses should use the current temporary reforms to assess their situation and make a plan now.

If you would like assistance in understanding the temporary reforms and developing a plan for your business, or you have a query relating to any of the information in this article, then please don’t hesitate to get in contact with Angela Haynes of KPMG’s Restructuring Services Team at ahaynes1@kpmg.com.au or 0419 444 010.