COVID-19 Government Measures

As part of the government’s economic response to COVID-19 it provides temporary relief for financially distressed businesses.

On 24 September 2020, the Federal Treasurer announced his proposed major reforms to insolvency laws to support small business recovery and streamline the insolvency process. These insolvency law reforms were announced by the Federal Government to help small businesses survive the economic impact of COVID-19 by introducing new restructuring processes and a simplified liquidation pathway.

The draft legislation was announced by the Treasurer on 24 September 2020 and comprised of three key elements:

1. A new debt restructuring process for eligible small companies which will allow the restructure of existing debts of a company whilst the directors remain in control;
2. A new simplified liquidation pathway for eligible small companies to allow for a faster and less costly liquidation process; and
3. Further measures to ensure that the insolvency sector can respond effectively to the increased demand and needs of small businesses.

The Treasurer anticipated that the new measures will reduce costs for distressed small businesses, reduce the time spent in the insolvency process and ultimately enable more small businesses to successfully restructure and survive the economic impact of COVID-19.

As the COVID-19 related government programs, including JobKeeper, are wound down it is anticipated that there will be a significant wave of insolvencies. Of the companies that entered external administration in the 2019 financial year, around 76 per cent had less than $1 million in liabilities and would have been eligible for these new processes.

The insolvency reforms and the Act commenced on 1 January 2021.

Temporary Restructuring Relief

The temporary restructuring relief has been introduced to extend certain measures implemented by the government to assist eligible companies in continuing to trade during COVID-19.

These measures have been extended to 31 March 2021, and include the following for eligible companies:

• Increased the amount that must be owed to a creditor from $2,000 to $20,000 before a creditor can issue a statutory demand for payment on the company;
• Increased the time that a company has to respond to a statutory demand from 21 days to 6 months; and
• Providing the directors with temporary safe harbour from personal liability for insolvent trading for debts incurred in the ordinary course of business.

To be eligible for temporary restructuring relief, the eligibility criteria is as follows:

• Total liabilities of the company do not exceed $1 million;
• The company has not been subject to a restructure or a simplified liquidation in the last 7 years;
• The directors (current directors and directors in the previous 12 months) have not been the director of another company subject to a restructure or a simplified liquidation in the last 7 years;
• The company is insolvent, or likely to become insolvent;
• The board of directors has resolved that a restructuring practitioner for the company should be appointed; and
• There is no external administrator appointed to the company.

The temporary restructuring relief is available to a company if, between 1 January 2021 and 31 March 2021, the company’s directors:

• Make the required declaration about the company’s eligibility for temporary restructuring relief;
• Publish a notice of the directors’ declaration on the ASIC Published Notices Website; and
• Provide a copy of the declaration to ASIC within 5 business days of the making of the declaration. This declaration is an ASIC Form EX07.

The period of relief only begins when the directors have made the required declaration and published notice of their declaration on the ASIC Published Notices Website. This means that from 1 January 2021 until the directors make the required declaration, there is no safe harbour for directors from personal liability for insolvent trading, and the increased thresholds and time periods for statutory demands will not apply.

The temporary restructuring relief lasts for 3 months from the date that the declaration is made and notice is published on the ASIC Website. This can be extended for a further 1 month, where the company has taken all reasonable steps but has been unable to appoint a restructuring practitioner during this time. The extension required a further declaration and notice published on the ASIC Website, and this must be done no later than 2 weeks before the 3 month relief period expires.