With insolvency rules relaxed in March for an initial period of six months, there were concerns we would see a spike in insolvencies at the end of September once the grace period ended. Insolvencies are already down 60% this year compared to last year as a result of the measures, meaning there are several businesses which would have been poised to commence insolvency proceedings once the rules returned to normal.
The temporary measures were designed to support businesses experiencing financial stress as a result of COVID-19 and prevent them from having to go down the insolvency track until they’d had a chance to focus on their recovery.
Initially established over a six month period, the government has now announced that the measures will be extended until the end of the year. The move will enable businesses to trade out of insolvency, especially those that have been impacted by the current lockdowns in Victoria.
What are the changes to the insolvency rules?
Insolvency rules have been relaxed to include the following:
- An increase in the amount of debt a business can hold before the creditor can make a statutory demand for payment from $2000.00 to $20,000.00.
- An extension in the time a debtor has to respond to a creditor demand for payment from 21 days to 6 months.
- An increase in the time a debtor has to respond to a bankruptcy notice from 21 days to 6 months. It is hoped that this extension of time will allow for debtors to make arrangements for repayment thereby reducing the need for the bankruptcy to come into fruition.
- If a business decides, voluntarily, to file for bankruptcy, the unsecured creditors will have to wait longer to make a claim against the business to recover debts owed to them. This time frame will also increase from 21 days to 6 months.
- Finally, to assist individuals the government has increased the rate of debt from $5,000.00 to $20,000.00 before a creditor can initiate bankruptcy proceedings.
What are the changes to personal liability?
Personal liability rules have been relaxed to include the following:
- Directors are temporarily resolved of personal responsibility for trading under conditions of possible or actual insolvency. This only applies to debts that are incurred during the ordinary course of business. This doesn’t apply in cases of dishonesty or fraud.
While the extension of the changes will be a relief to many businesses, we are likely to still see an increase in insolvencies come 2021, unless the grace period is extended once again. If the economic situation improves before then and we don’t see any further lockdowns this year once Victoria opens up again, it may give businesses who would otherwise be facing insolvency enough time to repay debts and rebuild. However three months is not a long time to turn things around, especially for those Victorian businesses subject to lockdowns. It remains to be seen if the extension of the changes will pay off or whether another extension in 2021 may be required.