Background
In response to the COVID-19 pandemic, the Commonwealth government introduced a number of temporary changes to the
Corporations Act 2001 (Cth) to mitigate the negative economic impacts of the pandemic. While further narrower insolvency law reforms took effect on 1 January 2021, most of the temporary changes that were designed to give companies 'breathing space' ended on 31 December 2020. Although there was speculation that these temporary changes may have been extended for a further 3-6 months, the Government did not do this. Therefore, many private providers may still find themselves in a challenging financial position as a result of the pandemic. Those who have cash flow issues, should be actively considering their position and be prepared to move quickly to respond to challenges that may arise in 2021, including seeking the assistance of an insolvency practitioner to either assist with developing a restructuring plan, to assist with cost cutting mechanisms or if the entity is unable to continue operating, to avoid potential personal liability for directors by the appointment of an external administrator.
The key changes to consider are:
- the temporary relief from civil liability for insolvency trading has now ended (however, there is a further short period of relief for 'eligible companies');
- from 1 January 2021, the threshold amount for a creditor's statutory demand reverted to $2,000 (from $20,000);
- a provider that is served with a creditor's statutory demand must satisfy the demand or have it set aside by a court (or withdrawn by agreement) within 21 days, rather than 6 months. If a provider fails to achieve this within the 21 day period, it will be presumed to be insolvent and may be wound up by the Court on that basis; and
- the small business restructuring provisions described below will commence.
Temporary relief from insolvent trading
On 25 March 2020, the Commonwealth government introduced an amendment to the Corporations Act 2001 (Cth) that afforded a safe harbour against civil liability from insolvent trading in respect of debts incurred by a company in the ordinary course of its business, for a temporary period (that was ultimately extended to 31 December 2020) and before any appointment of an administrator or liquidator.
In December 2020, the Commonwealth government passed further legislation, to implement a number of further (permanent) insolvency law reforms, which took effect on 1 January 2021 when the existing temporary changes expired. The new laws include a further 3 month period of relief from insolvent trading laws (with the possibility for a further one month extension after that) that is only available to companies that:
- have 'liabilities' (excluding liabilities that are employee entitlements and certain debts incurred while the company was subject to a deed of company arrangement) of less than $1 million; and
- have declared an intention to access the new small business restructuring process, which is explained in more detail below.
Directors of the eligible small businesses who may need to rely on the new laws in 2021 should seek expert advice to plan ahead, to confirm their eligibility for the new procedure, and gain an understanding of the steps that they need to take (having regard to their business) to obtain protection.
Directors of companies who are not eligible for protection under the new laws will, from 1 January 2021, be limited to relying on traditional pre-COVID safe harbour protection where available, and the existing defences to liability for insolvent trading. Directors who may need to rely on the safe harbour regime should act early and seek advice to gain an understanding of whether the regime is available, by taking into account:
- eligibility criteria, including payment of outstanding employee entitlements and up to date tax obligations; and
- the necessity to take advice from an appropriately qualified advisor (who is given sufficient information to give appropriate advice), and to develop and implement an appropriate restructuring plan. In most cases, this is a requirement to gain safe harbour protection.
Creditor's statutory demands
Along with the temporary changes to insolvent trading laws last year, the Commonwealth government also made changes to the regime for creditor's statutory demands.
Those temporary changes were significant and substantially limited a creditor's ability to implement winding up proceedings against a debtor company for the period to 31 December 2020.
However, those temporary changes expired on 31 December 2020. Subject to our comments below, the criteria for issuing and responding to a statutory demand have now reverted to their pre-COVID thresholds, meaning that:
- the minimum amount in respect of which a creditor's statutory demand can be issued is $2,000; and
- the time available to respond to a statutory demand is 21 days.
The regulations that will be made in connection with the latest insolvency reforms will afford temporary relief to 'small businesses' that are eligible under the new laws. This temporary relief will effectively extend a modified statutory demand regime for small businesses that have declared an intention to access the new small business restructuring process through until 31 July 2021.
Boards and senior management should be aware that if their company receives a creditor's statutory demand in the New Year they will only have 21 days to respond.
Due to the timing of the temporary relief lapsing, companies may be faced with a situation where a statutory demand is received (either physically or electronically) while the business is 'shut down' for the Summer holiday period.
The 21 day time limit begins at the time the creditor's statutory demand is delivered to the company's registered office, and cannot be extended. If a creditor's statutory demand is not recognised by management in a timely way, there will be less time for the company to respond or comply with it.
Failure to comply with a statutory demand creates a presumption that the company is insolvent which can have a number of significant consequences. These could include triggering notification requirements, breaches of loan facilities and other contractual arrangements and potentially orders for the company to be wound up in insolvency.
Small business restructuring
The Commonwealth government's insolvency reforms will establish a new formal debt restructuring process for eligible companies, which is to be supervised by 'small business restructuring practitioners' (SBRP). This will enable financially distressed but viable companies to restructure their existing debts so that they can continue to trade.
The main eligibility criteria for small business restructuring is that the company's total liabilities (not including liabilities that are employee entitlements or certain debts incurred while the company was subject to a deed of company arrangement) on the day that restructuring begins do not exceed $1 million.
After a company enters restructuring (essentially, by appointing a SBRP) it will have 20 days to propose a restructuring plan. This period may be extended by the company (once only) by up to 10 business days, or such other period as ordered by a Court. A company will be taken to be insolvent if it proposes a restructuring plan to its creditors.
There are two further key criteria that a company must satisfy to be able to use the small business restructuring process:
- the company must have paid all employee entitlements which are payable including wages and superannuation; and
- the company's tax lodgements must also be up-to-date.
As noted above, the extensions to relief from insolvent trading liability and proposed extensions to the creditor's statutory demand regime, relate only to companies that have declared an intention to access the new small business restructuring process but have not yet done so. This declaration must have been made between 1 January 2021 and 31 March 2021.
You can read more about the new insolvency laws that took effect on 1 January 2021 in our recent article.
For more information about these changes
The timing of the temporary relief expiring and the significant consequences that attach to it may present an acute challenge for private providers needing to respond effectively to these changes. If you need advice about the impact of these changes, as well as what options may be available to you, please contact our specialist team to discuss these issues further.