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New Government concessions aim to minimise insolvencies in Covid-19 downturnJennifer O'Farrell Posted 25 March 2020
With the economy in freefall as a result of Covid-19 and associated shutdown measures, it’s a very uncertain time for companies, their directors and employees. Because many Australian businesses have been sustained by borrowings for the past few decades, few have generous cash reserves to meet large wages bills for more than a couple of months. Already employees are being stood down or their employment has been terminated. The elephant in workplaces all over the country is the prospect of insolvency.
Australia has some of the toughest insolvency laws in the world, which readily render directors personally liable for insolvent trading and tax related debts. The Government has just passed the Coronavirus Economic Response Package Omnibus Act 2020 (Cth) which will loosen some laws which ordinarily affect insolvent entities and their directors. The changes include:
- Increasing the threshold under which creditors can issue a statutory demand (failure to respond to which leads to an application to wind up a company up in insolvency). This is a common strategy employed by someone who is owed money by a company. The threshold will increase from $2,000 to $20,000 for the next six months. The time in which the debtor company must respond to the statutory demand will also increase from 21 days to 6 months. So we will see fewer statutory demands served on debtor businesses and businesses will have longer to respond, pay the debt (if agreed) or ultimately go into liquidation.
- There is a similar increase in the threshold for initiating bankruptcy proceedings to bankrupt a personal debtor (which includes a sole trader). In order for a person to become bankrupt as a result of a bankruptcy notice and creditor’s petition, the threshold has increased from $5,000 to $20,000 for the next six months. Debtors will also have 6 months to respond to a bankruptcy notice rather than the present 21 days.
- Directors of corporate entities will also be relieved from liability for debts which the company incurs whilst it is trading insolvent for the next 6 months, so long as those debts are incurred in the ordinary course of the company’s business. The company will remain liable for the debts.
This is not a carte blanche to incur debts outside of the ordinary course of business. Directors will also remain criminally liable for egregious cases of dishonesty and fraud. Directors will also remain personally liable for instances of insolvent trading which occur outside the legislated moratorium, even though insolvency may commence within the six month window.
Australian Taxation Office Assistance
Outside of the Bill, the ATO has agreed to measures which will reduce cash pressure on businesses, such as accommodating more generous payment arrangements, remitting penalties and interest and extending the time for payment of BAS related tax debts.
Relief measures are not applied automatically, they need to be sought on a case by case basis.
Notwithstanding this period of interim leniency, lodging BAS and other tax returns should never be avoided, and the ATO and Government have not waived or reduced tax debts which businesses incur.
Directors may become personally liable for company tax debts under the director penalty notice (‘DPN’) regime (for PAYG tax, the superannuation guarantee charge and, as of April 2020, GST, Luxury Car Tax and Wine Equalisation Tax) if they either do not lodge returns or pay on time. The obligations to lodge returns and make debt payments are not removed as a result of these recent measures.
The ATO has indicated that it will withhold enforcing DPNs for directors of businesses that are struggling due to Covid-19, however that does not appear to prevent the ATO from issuing a DPN in the future, including for historical defaults.
Directors can avoid the prospect of personal liability by being upfront about a company’s financial difficulty, and negotiating an appropriate arrangement with the ATO, whether that be a payment arrangement or a deferral. As we will explain in a separate article, tax debts are not delayed because the ATO agrees to a repayment arrangement.
The above measures are useful and may encourage businesses to stay open during the current economic downturn.
However it should be stressed that these are only temporary measures. Businesses will eventually have to pay back any debts that they have incurred during this period, and must continue to pay enforceable tax debts. If directors consider their company to be insolvent and there is no prospect of them paying their debts even with the benefit of available concessions, they should seek advice about the appointment of an administrator or a liquidator.
If you or your company requires advice as to the best strategy to pursue during these difficult times, we can advise you on your legal options.