Insolvency laws and how to handle debt recovery during the COVID-19 crisis when debtors are failing to pay

The Changes

You may have heard that at the start of the COVID-19 crisis, the federal government placed a moratorium on insolvent trading laws in a bid to help eligible businesses manage the economic challenges of the coronavirus pandemic.

The Morrison government has increased the threshold at which a creditor can issue a statutory demand (for corporate debts) from the current minimum of $2,000 to $20,000.

For bankruptcy (personal) matters, the debt required for creditors to issue a bankcruptcy notice has risen from $5,000 to $20,000.

Both changes will last for 6 months.

Furthermore, companies served with statutory demands and individuals served with a bankcruptcy notice will now have 6 months to respond to them, rather than 21 days.

Company directors will also obtain relief from personal liability if their company is trading whilst insolvent.

This obviously gives a debtor a lot more breathing room than the lower monetary thresholds/21 day waiting period.

The Impact

When a recession is looming or in play, debtors will always have a tendency to become slow payers or go silent on outstanding debts. This has an obvious impact on cashflow up the supply chain. In times of recesssion or downturn, opportunities to “make money” can reduce and more of a focus goes onto where can one can “recover monies” owing.

Whilst, the insolvency changes have taken effect as per the above, a creditor can still issue letters of demand to non-payers and also initiate court proceedings to recover the debt. Judgments can be enforced in a number of ways beyond the statutory demand/bankcruptcy notice routes, such as seeking garnishee orders (where money is taken directly from a debtor’s bank account), attachment of earnings orders and the seizure of property. There is no indication that these enforcement methods have been altered by this new COVID-19 law change.

For a more thorough outline of these changes, view the fact sheet provided by the federal government http://ow.ly/KPcR50yTyWp

The Solution

If you would like any further assistance in this area, or if you are unsure about whether these changes will affect you, please contact us. We are working with a number of clients on cost effective fixed priced basis to issue letter of demands, followed by issuing court proceedings to recover outstanding debts due. The appetite in the market seems to be trending towards debtors not wanting to expend legal fees on defending proceedings where debts are clearly due and the debtor doesn’t have the immediate cash to pay the debts (this is not universal, but an emerging trend). We anticipate a future trend therefore of creditors being able to obtain default judgments, which can then be used to secure the payment of the debt via one of the above mentioned enforcement methods. If this is something you require assistance with, please do not hesistate to reach out.

Sofia Garcia Ladera, Consultant (Admitted in England and Wales; not admitted in Australia)

 

2020-05-12T04:16:20+00:00May 4th, 2020|Business Advice, Corporate Advisory, Dispute Resolution|Comments Off on Insolvency laws and how to handle debt recovery during the COVID-19 crisis when debtors are failing to pay