Regulations will be made to extend the temporary increase in the threshold at which creditors can issue a statutory demand on a company and the time companies have to respond to statutory demands they receive, the Treasurer and the Attorney-General announced on Monday.
The changes will also extend the temporary relief for directors from any personal liability for trading while insolvent and are hoped to help prevent a further wave of failures before businesses have had the opportunity to recover.
“These measures were part of more than 80 temporary regulatory changes the government made designed to provide greater flexibility for businesses and individuals to operate during the coronavirus crisis,” Treasurer Josh Frydenberg and Attorney-General Christina Porter said in a joint statement.
“The extension of these measures will lessen the threat of actions that could unnecessarily push businesses into insolvency and external administration at a time when they continue to be impacted by health restrictions.”
The pair stressed that as the economy starts to recover, it will be critical that distressed businesses have the necessary flexibility to restructure or to wind down their operations in an orderly manner.
“The government will continue to help businesses successfully adapt and restructure so that they can bounce back on the other side of this crisis,” they said.
Business groups and experts have been worried about “zombie” businesses, which many argue have been propped up by government stimulus measures through the COVID-19 pandemic.
Earlier this year, the head of commercial disputes at Bartier Perry, Gavin Stuart, warned that, given the expanse of the coronavirus financial impact, the six-month suspension of insolvent trading laws could simply delay the collapse of a large number of businesses.
“Come September, many directors whose businesses are struggling will then have to rely on the existing safe harbour legislation, which like chapter 11 bankruptcy laws in the United States aims to help businesses restructure and trade through tough times,” Mr Stuart said.
“The reality though is that even before COVID-19, very few smaller- to medium-sized Australian companies used these laws because of the complexity, cost and confusion that surround them.”
Similarly, Prushka Fast Debt Recovery chief executive Roger Mendelson said that while the government’s initiatives to support businesses through the COVID-19 pandemic were helping keep companies afloat, it will cause a backlog of wind-up and bankruptcy cases.
“From April, the government issued several temporary changes to support financially distressed businesses, including extending the time companies have to respond to a statutory demand from 21 days to six months. This has caused an incredible slowdown in the debt collection process,” Mr Mendelson said.
“This backlog of cases could cause major economic dislocation post-COVID in a time where we will need entrepreneurs thriving and small-business owners working towards rebuilding.
“If the government were to extend these measures, Australian SMEs would be restricted from taking action to protect their livelihood, and it could also encourage irresponsible businesses to incur debts they have no hope of paying.”