Bankruptcy concessions extended for 3 months
Temporary concessions for bankruptcy actions and director liability claims have been extended to 31 December 2020. This will bring welcome relief for businesses who need more time to get back on their feet. However, businesses who have clients or customers in financial difficulty should seek assistance from their advisors on the next steps forward.
The Federal Government has announced that it will extend the special rules applying to bankruptcy actions and director personal liability claims. The rules were implemented in March to prevent a wave of bankruptcies and court action being caused by the pandemic economic downturn, before businesses had a chance to recover.
The rules were designed to finish on 28 September, but now will last until at least 31 December 2020.
Normally, the bankruptcy rules apply to a debt of $5,000 or more. While the COVID-19 concessions are in place, this is $20,000. In addition, if a creditor flags its intention to present a debtor’s petition, the debtor is protected from enforcement action for 6 months (normally it is 21 days).
There are also rules designed to protect directors of companies personally by way of what is termed a “safe harbour”. It provides directors with relief from personal liability for insolvent trading if debts are incurred in the ordinary course of business. Directors otherwise have an overriding duty to prevent insolvent trading.
A director may rely on the safe harbour in relation to a debt incurred by the company if the debt is incurred:
- in the ordinary course of the company’s business;
- during the period starting on 24 March and ending on 31 December 2020; and
- before any appointment of an administrator or liquidator of the company during this period.
A director is taken to incur a debt in the ordinary course of business if it is necessary to facilitate the continuation of the business. This could include, for example, a director taking out a loan to move some business operations online. It could also include debts incurred through continuing to pay employees during the pandemic.
The rules apply to holding companies and also subsidiaries.
The rules have implications in 2 ways – for those companies that may be struggling due to the economic downturn caused by the pandemic, or if a business has customers who may be in financial difficulty. We will look at each of these in turn.
For companies who are struggling to pay their debts, the extension will be a welcome relief. The concessions are designed to provide time for businesses to get back on their feet and trade their way out of difficulty. Clearly, the COVID-19 crisis is not over, so extra breathing space is welcome.
For those of you who have customers or clients struggling to pay debts, a note of caution may be warranted, however. If a customer is struggling, the extension does not address the cause of their problems. The question must be asked – can a customer get back on his or her feet? It might be sensible to review all debts and debtors to see if the current management policies are suitable.
For example, consider the ageing of debtors. For those customers who may not have a great record when it comes to timely payments, a pre-payment may be required. Or perhaps offer discounts for up-front payments. Consider also the possibility of arranging a retainer or set annual fee, that is payable monthly via direct debit. This is something that may be negotiated with long-standing customers or clients with whom you have a good understanding.
Courtesy of Thomson Reuters