UPDATE: Changes to the COVID-19 insolvency and bankruptcy protections

In March 2020, the Australian Government introduced a suite of changes to the federal insolvency and bankruptcy laws in response to the economic impact of COVID-19. These measures were initially implemented for a six-month period and included increased protections for businesses and individuals who faced the threat of insolvency or bankruptcy by reason of the economic pressures impacted by the COVID-19 health restrictions.

 

Those interim measures were initially scheduled to come to an end in late September 2020. However, the Government provided further relief by extending the interim measures until 31 December 2020.

With the year now 2021, here's an update on the status of those interim protections.

Insolvency


Bankruptcy


Safe harbour

The temporary safe harbour relief for directors came to an end on 31 December 2020.

For those who aren't aware, company directors are under a duty to prevent insolvent trading by their company. Prior to COVID-19, a director would be personally liable for insolvent trading:


  • for the business incurring a debt when it was insolvent (or is made insolvent by reason of that debt); and
  • the director had reasonable grounds to suspect the company was insolvent at the time (or would be made insolvent by the incurring debt).
Part of the Government's interim measures included an interim safe harbour defence for directors from liability arising by reason of insolvent trading during that period.

However, directors who engaged in dishonest or fraudulent conduct during that interim period that would attract criminal penalties, were not relieved by the interim safe harbour defence.

Future outlook

Notwithstanding the Government's announcement to amend the bankruptcy regulations such that the monetary threshold to issue a bankruptcy notice is increased to $10,000, that threshold amount remains well below the COVID-19 interim monetary threshold.

This change, coupled with the reversion of pre-COVID-19 bankruptcy and insolvency laws, means that we will most likely see a sharp increase of creditor petitions and winding up proceedings commencing on and from the next few weeks.

If you or your business will be affected by these insolvency changes and you are looking for advice, please get in touch with our Litigation and Dispute Resolution team today. We have extensive experience in advising large to small companies as well as directors, liquidators, creditors and other stakeholders of companies in an insolvency context and would be more than happy to assist.

Contributors

Gidon Kangisser Lawyer