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Debt Repayment and Liability

Updated: Oct 14, 2020

Given that all sectors of the economy are feeling the impact of COVID-19, the unfortunate consequence is that many businesses will struggle to meet their debt repayments. The Federal Government has recently announced various measures to assist financially distressed businesses by aiming to provide relief from certain possible consequences under the Corporations Act 2001 (Cth) (the Corporations Act) and other relevant pieces of legislation.

At the time of writing, the Government’s proposed changes with respect to insolvency and other amendments to relevant legislation and regulations are incorporated into the Coronavirus Economic Response Package Omnibus Bill 2020 (Omnibus Act), which received Royal Assent on 24 March 2020.

The changes outlined below formally commenced on 25 March 2020 and will apply for 6 months until 25 September 2020.

Some of the proposed measures include:

With respect to statutory demands issued after the commencement of the Omnibus Act:

  • Extending the time within which a debtor must respond to a statutory demand from 21 days to 6 months. If a debtor cannot satisfy payment of a debt under a statutory demand, then the company will be deemed to be insolvent, so this measure provides additional time for a business to manage its debts and avoid going out of business; and

  • The minimum debt required for a creditor to raise a statutory demand is raised from $2,000 to $20,000 (for a corporation). Whilst this will benefit debtors with one or multiple smaller debts owed to multiple creditors, it also poses a challenge to creditors with one or multiple smaller debts owed by multiple lenders. Such creditors will be less likely to be able to call on those debts by way of a formal statutory demand. The important news is that these proposed changes to the rules on statutory demands do not remove other existing measures available to creditors to call in debt, such as by enforcing security interests or otherwise taking legal action. That notwithstanding, it should have the effect of reducing the incidence of creditors issuing statutory demands, thereby keeping more businesses afloat.

Temporary relief is provided in respect of the personal liability of individual directors' duties to prevent insolvent trading with respect to any debts incurred in the ordinary course of the company’s business during the 6 months after the commencement of the Omnibus Act. We note that this relief does not apply to any debts incurred prior to the commencement of the Omnibus Act. We see this as a necessary adjunct to the above two amendments, without which a company might technically be trading on an insolvent basis, yet its creditors might be prevented from policing the insolvency through a statutory demand.

With respect to bankruptcy notices issued against individuals:

  • extending the time within which a debtor must respond to a bankruptcy notice from 21 days to 6 months; and

  • increasing the minimum threshold debt required for a creditor to initiate bankruptcy proceedings from $5,000 to $20,000.

The Act also grants the Treasurer powers to make temporary amendments to the Corporations Act whilst Parliament is not in session in order to provide relief from specific obligations or to modify obligations to enable compliance with legal requirements during the crisis.

The situation is evolving daily, and there will likely be further complex regulatory changes that might affect your business and/or your industry. Given the vast and ever-evolving nature of the financial impact of COVID-19, it is impossible to predict with certainty when, if and how, some sectors of industry or commerce might recover but we will continue to monitor and repeat these bulletins when we are able.

For further advice, please send us an email.


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