The Australian Government introduced temporary insolvency relief measures on 25 March 2020 in response to the COVID-19 pandemic. The purpose of the measures was to make sure that insolvency laws and processes don’t expose businesses to undue risk. The insolvency relief provisions were then extended to 31 December 2020.

With the measures coming to an end, here’s what it means for small businesses.

Quick summary of the insolvency relief procedures

The series of procedures announced by the Australian Government in March 2020 included multiple temporary changes to business insolvency laws. The insolvency measures were then extended to prevent a further wave of failures before struggling businesses have had the opportunity to recover.

These insolvency relief procedures included the following:

  • Insolvent trading — these measures were put in place to offer temporary relief from personal liability for directors who continue to trade while insolvent. The relief covers debts that are incurred by the business in order to continue to trade as usual but doesn’t include relief from statutory and common law directors’ duties.
  • Statutory demand changes — the insolvency relief procedures included a temporary increase of the threshold for statutory demand issued by creditors. This went up from $2,000 to $20,000, and the response time was also extended from 21 days to six months.

What impact do the insolvency relief measures have on businesses?

Federal Treasurer Josh Frydenberg stated that the measures were intended as a regulatory shield to offer protection for viable businesses while they adapt to COVID-safe trading. According to Frydenberg, the measures were further extended to prevent a fresh wave of business failures before companies have had time to recover after they were hit by the COVID-19 crisis.

The Government paired the insolvency relief measures with over 80 stimulus initiatives and temporary regulatory relief measures, have been highly effective at helping businesses to navigate the lockdowns and restrictions imposed by the government in response to the pandemic.

As a direct result of the insolvency relief measures, the number of companies entering insolvency halved when compared with the same time in 2019. At the same time, the number of voluntary administration appointments is down 55% when compared to the same period last year.

What happens when the economy starts to recover?

The purpose of extending the insolvency relief procedures was to provide stability for businesses in the light of the second COVID wave. However, the measures are hindering the business renewal that would help the economy bounce back, especially in Victoria, which was hit badly by the second wave. The insolvency relief provisions are not encouraging businesses to attract much needed capital after the end of the lockdown.

In 1993, following a recession, the government introduced the voluntary administration process with the purpose to encourage business renewal. The voluntary administration process offered businesses flexibility when it came to restructuring and survival after insolvency.

But with the significant decrease in the number of businesses opting for voluntary administration appointments in 2020, many companies are simply delaying the inevitable. By taking advantage of the insolvency relief provisions, companies also lose valuable time that they could use to seek an alternative to liquidation that would benefit stakeholders.

According to the Turnaround Management Association, less than 50% of Australian businesses are holding more than 6 months’ cash, which puts extra pressure on working capital. The extension of the insolvency relief provisions might continue to encourage the delay, which could result in more and more businesses going into liquidation.

The government has already recognised that businesses will need flexibility to wind down operations or restructure as the economy begins to recover. The insolvency relief procedures are simply delaying the inevitable for thousands of businesses, and the full impact of the pandemic on businesses is only likely to be revealed when the relief measures end.

The end of the insolvency relief provisions is highly likely to bring with it an unprecedented wave of insolvency processes. As the economy begins to recover, investment and redistribution of capital will be needed, and the insolvency law will play a critical role when it comes to the outcome of the pandemic for a large percentage of Australian businesses.

If you are the owner of a business and worried about your circumstances, get legal advice now so you receive a better outcome. Seeking professional advice can help you avoid personal liability for the debts of an insolvent company, so act now to learn what your options are.

Blaine Hattie is the principal commercial lawyer at Sutton Laurence King Lawyers. Blaine can be contacted on 03 9070 9810 or bsh@slklawyers.com.au.