Paying back debts during a pandemic can feel impossible. The fear of being chased, served or held personally liable for company loans.
The good news is, there’s a new safety net for directors and individuals which takes the pressure off managing debts (and creditors) in this tricky time. It’s called the Omnibus Act, and can temporarily soothe concerns over insolvency or bankruptcy while you focus on staying afloat.
Directors, Debts and Insolvency
If you’re the director of a company, you might already be across debts and insolvency; permission to skip ahead. If you’re a little unclear, here’s a primer.
Usually, a company is solvent when it can pay its debts on time, and insolvent if not. The Corporations Act 2001 (Cth) (“Corps Act”) places a duty on directors to prevent companies trading while insolvent - which could be a troublesome scenario given the current climate. For companies taking on new debt to stay alive during COVID-19, the consequences of failing to meet repayments can make decisions about taking on debt difficult.
In addition, the Corps Act holds the director personally liable for debts incurred while the company was insolvent, or if those debts caused the company to become insolvent. In fact, it’s an offence. This could result in a large fine or debt recovery proceeding - unpleasant prospects for anyone.
Enter: The Omnibus Act
Happily, provisions have been made to relieve the pressure - taking the form of the Omnibus Act.
This new Act recognises that business is no longer proceeding as usual, and debts can be problematic. Under the Act, directors are no longer personally liable for any debt incurred in the ordinary course of business, even if the company is trading whilst insolvent.
That’s right; insolvent trading is now a safe harbour for directors.
While the Omnibus Act doesn’t define when a debt is considered to have been incurred “in the ordinary course of business”, according to the explanatory memorandum, a debt is incurred in the ordinary course of business if the debt is necessary to keep the business afloat during the six months following 25 March 2020.
This is great news if, for example, you need to take out a loan to move business operations online or to continue paying staff during the Coronavirus pandemic.
What About Money Owed To Creditors?
Here’s what usually happens: if you don’t pay your debts on time, creditors can issue standard documents called statutory demands to enforce an outstanding debt. If the statutory demand isn’t met by the party that owes the debt, that party is presumed insolvent. The creditor can then begin proceedings to have the company wound up.
Now, if the statutory demand was served prior to 25 March 2020, it’s still valid for debts of $2,000 or more and can be enforced after 21 days.
However, as a result of the Omnibus Act, if a statutory demand was served on or after 25 March 2020, a creditor can only issue a statutory demand if the debt owed is at least $20,000. Plus, it can’t be enforced for six months at a minimum.
This gives you half a year to get things back on track without being forced into insolvency.
Changes To Bankruptcy For Individuals
Usually, when an individual owes money to creditors, that creditor can issue you with a bankruptcy notice to force you to pay the debt. A bankruptcy notice, much like a statutory demand, is a standard form document used to enforce debts against individuals.
As with statutory demands, COVID-19 has resulted in change.
If the bankruptcy notice was issued on or after 25 March 2020, the minimum amount of creditor debt required to initiate bankruptcy proceedings has been temporarily increased to $20,000. You also have six months to comply with any bankruptcy notice.
Early Access To Super
Another path to relief for individuals is early access to superannuation.
Eligible individuals can access up to $20,000, in two $10,000 payments. One for an application made during the 2019-20 financial year, and another for the 2020-21 financial year. If you’d like to know more, the ATO is your first port of call.
These applications must be made during the next six months, and eligibility criteria includes: unemployment, reduced working hours and sole traders with a 20% reduction in turnover.
The relief is made on compassionate grounds for individuals who have been affected by the adverse economic effects of COVID-19. To submit an application, you must have a myGov account. Get started here.
We hope these temporary-yet-powerful measures prove useful to you and your business. And as always, if you still have questions or aren’t sure what to do under mounting pressure from creditors, give us a call (+61 2 8880 9383) or email metis_at_metislaw.com.au to start the conversation.