Continuation of temporary insolvency measures through to the start of 2021 – Australian response to the Covid-19 coronavirus pandemic

Need to know

Insolvency and turnaround/restructuring professionals should note:

• The central planks of the Australian insolvency law response to the Covid-19 pandemic have been:
• Effective suspension of the duty of company directors to prevent insolvent trading (so long as debts are incurred in the ordinary course of business – a low bar).
• Substantial extension of the time for compliance with a creditor’s statutory demand (from the usual three weeks out to a lengthy six months) and increase of the minimum debt that may be the subject of such a statutory demand (from AUD2,000 out to a substantial AUD20,000). There are also similar reforms for bankruptcy proceedings against individuals (this note focuses on corporate insolvency).
• Implemented in March 2020 until an initial date of 26 September 2020, these measures have coincided with considerable reduction in the usual flow of formal insolvency appointments, according to ASIC statistics.
• The Treasurer announced today that these measures will now be in effect (without modification) until 31 December 2020.

Below follows further discussion – including as to how we see these measures impacting on the market.

Some further discussion

Reduction of pressure on debtors and directors

As mentioned above, these measures have already coincided with a significant reduction in the usual year-onyear volume of formal insolvency appointments. While the measures may not be the sole or even dominant cause of that reduction – other support packages such as JobKeeper and tax administration policy/practice changes will certainly have played a part – the measures do in practice contribute to an easing of the pressure on debtors and their directors.

Transfer of that pressure to creditors?

A concern in the market is that the eased pressure on debtors is simply translating into mounting pressure on creditors – bad debts are expected to skyrocket in the new year.  Practitioners are also concerned that, induced by these temporary measures, many debtor companies are going to be placed into formal insolvency proceedings at a very late stage of their financial distress – such that there will be nothing to restructure (and no cash to fund that restructuring effort), with a terminal liquidation of the debtor (and significant losses for creditors) almost certain.

This issue may be significantly compounded by the length of these measures being in place. By 31 December 2020, the measures will have been in effect for nine months – this will put a debtor in a position where the prospect of unfair preference recoveries and insolvent trading recoveries is somewhere between impossible and highly unlikely. This may well be intended – unavailability of these kinds of recoveries will make a quick business sale or recapitalisation through deed of company arrangement an obvious alternative. That said, placing creditors in this position – where a liquidation and recovery litigation is simply unavailable, and a debtor-driven outcome is a default – represents a considerable shift toward a debtor and director friendly environment, which is not consistent with the Australian insolvency and turnaround landscape. Creditors must exercise more vigilance than ever in extending credit.

Directors must avoid a false sense of security

While the environment for debtors and their directors is supportive, directors must not be lulled into a false sense of security by the extension of these measures. All of the usual duties of directors (other than insolvent trading) remain in full force. Simply allowing “business as usual” is quite probably not a sensible course in the current environment for many businesses – directors need to continually assess the options, plan for the future and implement those plans. The extension to December 2020 of these temporary measures provides some room and time to do that work without extreme pressure – directors and their advisors need to use the opportunity wisely.