Legal Tip 277: Insolvency Law Changes over the following 6 months

Discussion in 'Legal Issues' started by Terry_w, 23rd Mar, 2020.

Join Australia's most dynamic and respected property investment community
  1. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

    Joined:
    9th Jun, 2006
    Posts:
    30,810
    Location:
    Australia wide
    There will be several changes to the law to help companies and individuals stay afloat during this period of economic turmoil.


    a) Statutory demands – for companies

    At the moment a company can be wound up by a creditor that is owed $2,000 or more and who issues the company a statutory demand. The company has 21 days to pay and if it doesn’t winding up can commence.

    This will now be changed to $20,000 owing and the time period will be extended to 6 months.


    b) Bankruptcy – for individuals

    Currently an individual can be bankrupted over a debt of at least $5,000 by a creditor issuing a bankruptcy notice and the individual not paying or challenging the notice within 21 days.

    This has been increased from $5,000 to $20,000 and the time period from 21 days to 6 months.


    c) Insolvent Trading and Director Liability

    Currently if a director of a company causes the company to trade while insolvent that director can be personally liable for the debts of the company. This law will be temporarily suspended for a period of six months.


    Here is an example from the Treasury:

    Steph, Mon and David own a small company that operates a chain of yoga studios in Sydney. Social distancing measures require the participants in the yoga class to be significantly reduced. As a result, their company incurs more debt, to the point where it cannot meet its debts as and when they become due and payable.

    Under the provisions of the Corporations Act, the three owners would be personally liable if the business took on further debt without entering an insolvency procedure like voluntary administration or liquidation.

    However, during the six month period in which the temporary relief is offered, their business can continue to open their yoga studios so that they can maintain their customers and quickly resume normal operations when the crisis has passed, and continue to incur debt. When economic conditions improve, the company can pay back the debt incurred.


    see:

    https://treasury.gov.au/sites/defau...ief_for_financially_distressed_businesses.pdf
     
  2. CraigI_55

    CraigI_55 Member

    Joined:
    1st May, 2020
    Posts:
    12
    Location:
    Australia
    Great info Terry do you know if this is retrospective, ie if the insolvent trading occurred in 2019, and the liquidation was underway, and the action against the director proceeds now - will they be personally liable?

    Also is the director personally liable for just the debt incurred after the insolvency event, or all the debt of the company?
     
  3. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

    Joined:
    9th Jun, 2006
    Posts:
    30,810
    Location:
    Australia wide
    A director wouldnt be liable for actions of the company before they become director. Just for the transactions while insolvent.
     
  4. CraigI_55

    CraigI_55 Member

    Joined:
    1st May, 2020
    Posts:
    12
    Location:
    Australia
    Yes that makes sense. If the insolvent trading occurred prior to this 6 month amnesty, and the action against the director proceeds now, do you think the 6 month amnesty will apply?

    I guess the litigating party (ie liquidator on behalf of creditors) could just wait 6 months before pursuing the director.
     
  5. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

    Joined:
    9th Jun, 2006
    Posts:
    30,810
    Location:
    Australia wide
    I don't know off the top of my head, would need to examine the wording of the legislation.
     
  6. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

    Joined:
    9th Jun, 2006
    Posts:
    30,810
    Location:
    Australia wide
    The 6 month point is coming up soon.

    If you are a director and your company is trading insolvent after this date you could be personally liable. Best to seek legal advice on this asap.
     
  7. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

    Joined:
    18th Jun, 2015
    Posts:
    15,067
    Location:
    Sydney
    The extension is to be extended to 31/12/2020 according to Govt.

    There are many worrying about the collision of :
    1. Tenancy concessions and deferrals
    2. Jobkeeper (some will see it extended to March 2021)
    3. Loan deferrals
    4. Windback of jobkeeper
    5. End of cashflow boost
    6. Windback of jobseeker (to leave Newstart)
    7. Accrued unpaid PAYG withholding
    8. Accrued unpaid employee super
    9. Accruing creditors whether they were deferred from enforcement or not. Like rolling a snowball down a hill. It just gets too big
    10. ATO liabilities

    As these support mechanisms are unwound the insolvency triggers may become apparent to Directors.
    Exposing personal assets (if they arent already exposed) eg guarantees, bank guarantees, etc