Temporary relief for financially distressed businesses

Business Re-Opening After COVID-19 – What’s Next For Your Business

For many businesses, 2020 will be the defining year in their business cycle. The economic impact of COVID-19 has placed an extraordinary amount of businesses under financial distress. Many have been forced to halt operations and re-evaluate whether resumption is a viable option.

The Australian government has been very proactive in this space and has implemented certain measures with the aim of providing temporary relief for financially distressed businesses. This included the creation of a temporary safe harbour relief for a six month safe harbour period starting on 25 March 2020.

Extension of temporary relief for financially distressed businesses

As each day passes it is becoming increasingly evident that the economic impact of the COVID-19 pandemic will last well beyond the creation of a vaccine. The government has responded by extending relief for small business beyond what was a proposed 25 September 2020 end date. That date has been extended to the end of the year, 31 December 2020, with additional legislative amendments almost certain to follow in January.

There have been constant changes throughout what is a fluid macroeconomic event. The common theme for small businesses has been to sustain and survive, rather than top strive. The government is expanding its relief for small business and it is essential for all business owners to be aware of the changes regarding corporate insolvency.

Relief for small businesses – What is included?

Predicting what will happen next in the current economic environment is an impossible task for governments, let alone small businesses. Consequently, it is important to be aware of legislative changes as there could be a safety net in the form of temporary relief that will allow you to resume normal business operations.
When the government announced its temporary relief measures for small businesses, it considered all parties involved. The issues faced by companies, directors of companies and individuals have all been addressed. The current measures of relief for small business fall into two categories, temporary insolvency, and bankruptcy protections.

Temporary Insolvency

The measures with respect to temporary insolvency have been created to provide small companies with financial relief and their directors with enough time to increase the prospects for financial stability. Companies and directors should be aware of the following changes:

Statutory Demands

A creditor issuing a statutory demand is a common way for a company to enter liquidation. To prevent an excessive amount of liquidations, the following relief measures were put in place:
• An increase in the minimum threshold for creditors issuing a statutory demand on a company. The amount has been increased significantly from $2,000 to $20,000.
• Extension to the timeframe that a company has to respond to a statutory demand. The time has increased from 21 days to 6 months.

Director Duties

• Changes to director duties with respect to preventing insolvent trading. Directors of companies are temporarily relieved of the duty to prevent insolvent trading for 6 months in respect of any debts incurred. This is provided that the debts are related to the ordinary course of the company's business.
• A complementary measure to the above is the introduction of a temporary safe harbour.
Directors are now able to access a temporary safe harbour and implement a restructuring plan. The higher thresholds will help limit the amount of statutory demands with the additional time providing further relief and increasing the prospects of a successful restructure.

Bankruptcy Options

Most businesses in Australia are unincorporated entities such as sole traders. The regulatory relief that has been implemented provides specific bankruptcy protections for individuals as per the Bankruptcy Act 1966. They include:

• An increase to the minimum amount of debt required for a creditor to initiate bankruptcy proceedings against a debtor. The amount has been increased significantly from $5,000 to $20,000.
• The time to respond to a bankruptcy notice has been extended from 21 days to 6 months.
Individuals should be aware that a failure to respond to a bankruptcy notice is the most common act of bankruptcy. The additional time is being provided so that debtors are afforded a greater opportunity to enter repayment arrangements before being forced into bankruptcy.

What’s Next?

The government is completely aware that the economic outlook for small business is difficult to predict. The extension of temporary relief for financially distressed businesses is helping and has also given the government more time to explore insolvency reform. The proposed legislative changes will come into effect on 1 January 2021 and will focus on three key areas:

Debt Restructuring

• A less complex restructure process will support small businesses and maximise their chances of survival.
• Abolishment of a uniform system. Companies with liabilities totalling less than $1 million will be able to access a simplified restructure process.
• Adoption of a ‘debtor in possession model’.

Simplified Liquidation

• Faster and more affordable liquidation with the aim of increasing the amount of money retuned to creditors and employees.
• Removal of creditor meetings.
• Use of technological advances for procedures such as voting and other communication.

Complementary Measures

• Included to ensure insolvency sector can respond to both short term and long-term support demands.
• Ability to make future amendments to regulatory framework in a more efficient manner.

Moving forward there are steps that companies, directors of companies and individuals can take. Stay well informed and up to date as additional regulatory relief may be provided. Similarly, we are set to see more regulatory reforms with respect to insolvency over the next few years than we have in the preceding decades. For more information on the proposed legislative changes, read Insolvency Reform to Support small Businesses.