Insights / March 23rd, 2020

COVID-19: Winding-up and bankruptcy: Big (temporary) changes

The Government has announced proposed changes to personal and corporate insolvency laws to provide temporary relief to debtors in connection with compulsory insolvency processes.

Changes to statutory demands and bankruptcy notices

Prior to the Government announcement over the weekend, a statutory demand could be issued against a company for non-payment of a debt of $2,000 and over. Failure to comply with the statutory demand will lead to the company being presumed insolvent and can form the basis for a Court ordered winding up.

For personal debtors, AFSA can issue a bankruptcy notice upon a creditor’s request based on judgment debts of $5,000 and over. Failure to comply with a bankruptcy notice will entitle a creditor to seek a Court order making the debtor personally bankrupt.

The proposed changes involve raising the following thresholds:

  • $2,000 to $20,000 for a statutory demand served on a corporation; and

  • $5,000 to $20,000 before a bankruptcy notice can be issued against an individual.

Currently, a debtor will be taken to have not complied, either with a statutory demand or bankruptcy notice, 21 days from when service has occurred, thus opening them up to winding up or bankruptcy. The proposal is that this time will extend from 21 days to 6 months.

These changes will make it significantly less useful to rely on issuing statutory demands against companies and bankruptcy notices against individuals as a means to seek payment, including judgment debts.

What are the alternatives?

The proposals do not change, however, a debtor’s legal obligations to pay debts owed.

Moreover, the primary means of debt collection are unaffected.

Firstly, in the case of non-paying corporate debtors, creditors will need to give greater priority to issuing proceedings out of Court given it will be harder to use statutory demands.

Secondly, for both personal and corporate debtors, creditors holding judgments can still use direct enforcement processes through the Court system. These include issuing of:

  • an investigation summons to determine a debtor’s means to pay;

  • garnishee orders;

  • seizure and sale of property orders; and

  • charging orders.

The Court can also appoint a receiver.

Different approaches will suit different fact scenarios.

Cowell Clarke’s experience is that, whilst involving some additional expense, taking these more direct approaches after obtaining a judgment can be very effective in persuading a debtor to make payment of an unpaid debt.

It remains to be seen however how the Court will treat the alternative enforcement processes where the temporary measures proposed by the Government are designed to provide some relief in these uncertain times.

If you have any queries about the proposed changes to the Corporations Act 2001 and Bankruptcy Act 1966, which will be in place for 6 months, please Contact Us and Peter Leech and Symoane Mercurio will be able to assist you.

This publication has been prepared for general guidance on matters of interest only and does not constitute professional legal advice. You should not act upon the information contained in this publication without obtaining specific professional legal advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication and to the extent permitted by law, Cowell Clarke does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting or refraining to act in relation on the information contained in this publication or for any decision based on it.