The Federal Government has announced that it will extend the special rules applying to bankruptcy actions and director personal liability claims. The rules were implemented in March to prevent a wave of bankruptcies and court actions being caused by the pandemic economic downturn, before businesses had a chance to recover – the end date extended from 28 September to 31 December 2020.
Normally, the bankruptcy rules apply to a debt of $5,000 or more. While the concessions in place, this is $20,000. In addition, if a creditor flags its intention to present a debtor’s petition, the debtor is protected from enforcement action for 6 months (normally it is 21 days).
There are also rules designed to protect directors of companies personally, termed a “safe harbour”. It provides directors with relief from personal liability for insolvent trading if debts are incurred in the ordinary course of business. Directors otherwise have an overriding duty to prevent insolvent trading.
A director may rely on the safe harbour in relation to a debt incurred by the company if the debt is incurred:
- in the ordinary course of the company's business;
- during the period starting on 24 March and ending on 31 December 2020; and
- before any appointment of an administrator or liquidator of the company during this period.
A director is taken to incur a debt in the ordinary course of business if it is necessary to facilitate the continuation of the business. For example, a director taking out a loan to move some business operations online or to continue to pay employees during the pandemic.
For companies struggling to pay their debts, the extension will be a welcome relief. The concessions are designed to provide time for businesses to get back on their feet and trade their way out of difficulty.
A word of caution for those of you with customers struggling to pay debts – the extension may not be the remedy to their problems. The question is – can a customer get back on his or her feet? It might be sensible to review all debts and debtors to see if a different payment scheme is called for, eg pre-payments (with discounts), a retainer or annual fee, or a pre-agreed fixed monthly payment through direct debit. This is something that may be negotiated with long-standing customers or clients with whom you have a good understanding.