Whilst the world is watching the horrific health consequences of the Coronarvirus pandemic unfold, the virus is also having a devastating economic impact across almost all areas of commerce. Few have been spared.

Tens of thousands have already lost their jobs (soon to be millions), tenants are already looking to landlords for rent relief and the banks are offering up loan deferrals for borrowers. All of this has taken place in a frighteningly short period of time.

Realisation as to the magnitude and depth of this crisis is beginning to sink in. Currently no one is capable of accurately predicting how long it will last and both governments and business are grappling with how to limit the impact and mitigate the damage. This much is clear, there will be casualties. Lots of them.

Changes to insolvency laws

As part of the effort to minimise the damage, the Government has announced some significant changes to the current Insolvency laws:

The Government is temporarily increasing the threshold at which creditors can issue a statutory demand on a company and the time companies have to respond to statutory demands they receive.

Ordinarily the minimum threshold debt for creditors issuing a statutory demand under the Corporations Act 2001, is $2,000. That is now increased to $20,000. Further the time for a company to respond to a statutory demand is ordinarily 21 days. That period has now been extended to 6 months.

The government response also includes similar amendments relating to personal insolvency.

Ordinarily the minimum threshold debt for a creditor to initiate bankruptcy proceedings pursuant to the Bankruptcy Act 1966 is $5,000. That is now increased to $20,000. Further the time for an individual to respond to a bankruptcy notice is ordinarily 21 days. That period has now been extended to 6 months.

Relief for directors from any personal liability for trading while insolvent

Additionally, the new provisions include temporary relief for directors from any personal liability for trading while insolvent – though important for directors to note is that their obligations under sections 180 and 181 of the Corporations Act 2001 to exercise their powers and discharge their duties with reasonable care and skill and in good faith remains.

What are the consequences of these changes?

Whether these changes have the intended effect remains to be seen. In the short term these changes will preclude an immediate deluge of liquidations and bankruptcies. On the face of it this sounds like a prudent measure. It will give businesses and individuals who are unable to pay their debts more time to work out their options (and hope the economy starts to fire again), however there will undoubtedly be unintended consequences and impacts for creditors.

If these temporary provisions merely allow debtors to kick the can down the road and or worse still incur substantially more debt, that will ultimately have a severe knock on effect that will ultimately see more businesses fail.

With that in mind, creditors could be excused for seeing these new provisions as a signal to instigate other aggressive litigious alternatives against debtors (such as issue proceedings or seeking freezing orders) to give themselves the best chance at getting paid.

Whatever happens, when the pandemic finally passes and the business world starts getting back to normal, the economic and litigious fallout will be just getting started. The time to prepare for that is now.

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