Market Briefing: Changes to Australian Insolvency Practice

This note has been prepared to guide company directors, their advisors, and creditors about the operation of the Temporary Insolvency Relief provided by the Federal Government.  It is not legal advice.  FerrierSilvia can assist you with further information about how this relief works.

As Covid measures wind down, with JobKeeper payments being phased out and economic activity resuming in most of the country, the Federal Government has extended three measures that have protected directors and companies from insolvency procedures. These measures were first introduced in March 2020; they are unlikely to be extended again.

The measures are:

  • The minimum amount on which a statutory demand can be issued has been raised to $20,000 (from the pre-Covid $2,000) until at least April. We expect this amount will be reduced, but possibly not to $2,000 – the comparable amount in personal insolvency has been reduced from a temporary Covid $20,000 to post Covid $10,000.
  • Time for compliance with a statutory demand was extended to 6 months. We expect this will return to the traditional 3 weeks in April
  • A new form of protection for the directors of smaller companies, called Temporary Restructuring Relief.

Temporary Restructuring Relief is available to companies with liabilities of less than $1 million (excluding employee entitlements and some contingent liabilities).  It provides protection against liability for Insolvent Trading where debts have been incurred in the ordinary course of the company’s business, but are not ultimately paid.

Relief is invoked by the director(s) resolving that the company is, or is likely to become, insolvent, and to appoint a Restructuring Practitioner, and the giving notice of the Relief on ASIC’s Insolvency Notices website.  The Directors must then give formal, separate notice to ASIC of the Relief.

Relief lasts for an initial period of up to 3 months, but can be extended in some case for 1 further month.  It will end if the company ceases to qualify for relief, or an external administrator (Voluntary Administrator or Liquidator) is appointed.

Relief is once-off, and limited to one company – once a director has sought relief, she cannot seek it again for another company.

Temporary Restructuring Relief has been brought in on the basis that there may be a shortage of qualified Restructuring Practitioners able to undertake the more complex Small Business Restructuring (‘SBR’) process.  To date, we are seeing little evidence that the SBR is being used, for reasons about which we have written separately.  We expect this procedure will also have little impact on commercial conditions, though it serves as a reminder to suppliers to be careful about extending credit in present conditions.

Author: Peter Sheppard, Director

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