The effects of COVID-19 on small and large businesses alike has been unprecedented. It has become much harder for businesses to pay their debts, especially if their income has been significantly affected. 

In an effort to protect businesses from insolvency (a business is considered insolvent when it is unable to pay its debts when they are due for payment) the government has introduced temporary changes to the rules surrounding insolvency and personal liability when Directors trade during a period of insolvency. 

The changes will mean that Directors are now afforded more time and leniency before needing to pursue the formal insolvency procedures of voluntary administration, liquidation or receivership. 

What are the changes and how long will they last?

The following changes commenced on March 25, 2020 and will apply for six months until September 25, 2020. The basic changes 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 about personal liability?

In addition to these changes, the government is also concerned about the responsibilities and liabilities of Directors of corporations and companies. Under ordinary circumstances a Director cannot trade if the company is insolvent. If they do, they are held personally liable. 

But in these uncertain times, Directors need to have the freedom to trade in hopes of keeping the business alive and functioning. Therefore, Directors are being 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. As such, if you have a business that is appearing insolvent due to COVID-19 restrictions, the Directors will still be allowed to trade even if the company is incurring more debt, without creating any personally liability for their decisions. This relief will apply for 6 months in the hopes of giving Directors room to make the important decision required to keep the business running. 

Finally, to make it possible for decisions to move quickly and efficiently, the Australian Security and Investment Commission will vest Instrument Making Power to the Treasurer. This will occur under the Corporations Act 2001. The Treasurer will not be allowed to make temporary changes to the Act that will benefit corporations, in general, and provide relief from obligations that they would otherwise be subject to. This power will apply for 6 months.

It is hoped that these temporary changes will provide the time and support that businesses will need to recover from the effects of COVID-19 and continue to thrive.