Insolvency – Recent Changes & What You Need To Know

Insolvency - Recent Changes

There have been a number of recent changes to laws in the corporate insolvency area which will affect company directors and the businesses they run. Given the anticipated large scale disruption to business by COVID-19, and which disruption has the potential to cause significant solvency issues over the coming weeks and months, we provide a brief outline below of some of the more important changes which may be worth keeping in mind:

  • The “safe harbour” legislation and insolvent trading: These laws give company directors an opportunity to exempt themselves from incurring personal liability as a result of insolvent trading by their company. The exception will apply where the director(s) can evidence that they are developing a course of action which is ‘reasonably likely’ to lead to a ‘better outcome’ for their company than administration or liquidation. There are a number of key things which need to be done in order for the “safe harbour” exception to be available to a company director, including ensuring that proper books and records are kept and obtaining advice from ‘appropriately qualified’ advisors. Importantly, and as a result of COVID-19, the Federal Government intends to shortly pass new legislation that temporarily relieves company directors from personal liability for trading whilst insolvent in relation to debts incurred in the ordinary course of business during the next 6 months. However, the company itself will still be liable for the debts incurred, and egregious cases of dishonesty and fraud will remain subject to criminal penalties.
  • Debt recovery changes – COVID-19: The Federal Government intends to shortly make temporary changes to insolvency laws as part of a raft of measures directed to softening the economic impact, and likely difficulties with business and cashflow, as a result of the COVID-19. Of particular note are the following changes to debt recovery procedures, and which changes will be in place for the next 6 months:
    • the minimum threshold debt amount for creditors to issue statutory demands to companies will be lifted from $2,000 to $20,000.
    • if a statutory demand is issued to a company for a debt of at least $20,000, then the time for that company to comply with the statutory demands will be increased from 21 days to 6 months.
    • the minimum threshold judgment debt amount for creditors to issue bankruptcy notices to individuals will be lifted from $5,000 to $20,000.
    • if a bankruptcy notice is issued to an individual for a debt of at least $20,000, then the time for that individual to comply with the bankruptcy notice will be increased from 21 days to 6 months.

The above changes do not affect a creditor’s right to take legal action in the Courts for outstanding debts due and owing, whether against either a company or an individual.

  • New “Phoenixing” laws: Legislation was passed in February 2020 giving ASIC and others greater powers to detect and combat phoenixing, and to prosecute company directors and professional advisors who engage or assist in phoenixing. In short, phoenixing is the deliberate stripping and transferring of company assets to another entity, leaving the original company without the means to pay its debts, including money owed to employees. The new laws have strengthened the powers of ASIC and liquidators to recover assets “phoenixed” out of a company prior to liquidation. A new concept known as a ‘creditor defeating disposition’ has been introduced, making it an offence for company directors to engage in conduct which has the effect of disposing of assets of a company where the company subsequently enters external administration within the following 12 months. The disposition can be set aside, and the company director faces penalties which can include substantial fines, jail, and having to personally compensate the company for any loss.
  • New GST personal liability for directors: Up until recently, company directors, in certain circumstances, could only be held personally liable by the Australian Tax Office (ATO) for non-payment of a company’s PAYG and superannuation obligations. New laws starting from 1 April 2020 have now extended that personal liability to directors for the non-payment of GST by a company. The liability is incurred by the ATO issuing the director with a Director Penalty Notice (DPN) for unpaid GST and, like the position for PAYG and superannuation, where the company has lodged its activity statements within 3 months of the due dates, the director can avoid personal liability by placing the company into external administration (voluntary administration or liquidation) with 21 days of the DPN being issued or causing the company to pay the outstanding GST.  Where the company has failed to pay GST and has not lodged its activity statements, then a “lockdown” DPN is issued by the ATO, and the director cannot avoid personal liability for the GST, even if the company is placed into external administration.
  • Director resignations: The backdating of director resignations by more than 28 days has now been stopped, unless a court or ASIC approve otherwise.  A director resignation will now take effect only from the date the resignation document is lodged with ASIC, or within a maximum of 28 days before that lodgment. In the past, some directors attempted to avoid potential liability by significantly backdating their resignation date.  This “loophole” has now been closed.
  • Superannuation amnesty: The ATO has recently announced an amnesty for all eligible employers who may not have paid the correct amount of superannuation to their employees between 1 July 1992 and 31 March 2018. The amnesty runs to (at the moment) 11:59pm on 7 September 2020. If a superannuation shortfall is disclosed and paid (with interest) by an eligible employer, then no charges or penalties will be applied by the ATO. In addition, payments of superannuation made to the ATO before the end of the amnesty period will be tax deductible. Employers who do not take advantage of the amnesty will face significant charges and penalties when pursued by the ATO.

Key takeaway

In the current economic climate, company directors need to develop an early, clear strategy and plan to manage the issues that may arise over the next 6 months, including in respect to the solvency of their business. The matters discussed in this update should be taken into account as part of any strategy and plan developed.

If you would like more information or advice about the matters raised above, please contact our insolvency and litigation experts at Murdoch Lawyers on 1300 068 736.

This publication has been carefully prepared, but it has been written in general terms and should be viewed as broad guidance only. It does not purport to be comprehensive or to render advice. No one should rely on the information contained in this publication without first obtaining professional advice relevant to their own specific situation.

    Contact Information

    Direct Line: 07 4616 9818