64% drop in external administrations as insolvency relief measures are extended

In March of this year, the Federal Government announced a number of measures aimed at helping businesses and individuals stave off insolvency and bankruptcy (respectively) as COVID-19-related shutdowns brought large portions of the economy to a halt. Those measures included:

  • an increase to the debt threshold at which a creditor can issue a statutory demand from $2,000 to $20,000 and an extension to the amount of time a recipient of a statutory demand has to pay the debt or apply to have the debt set aside from 21 days to 6 months before the presumption of insolvency arises; and
  • temporary relief for directors from personal liability for insolvent trading for debts incurred in the ordinary course of business.

Pursuant to the Corporations and Bankruptcy Legislation Amendment (Extending Temporary Relief for Financially Distressed Businesses and Individuals) Regulations 2020 which came into effect yesterday, the above measures will be extended until the end of the year with the effect that:

  • creditors cannot issue a statutory demand for a debt less than $20,000 on or before 31 December 2020 and recipients of statutory demands served on or before 31 December 2020 will have 6 months to reply to or apply to have such statutory demands set aside; and
  • directors will not be personally liable for debts incurred on or before 31 December 2020 while the company is insolvent as long as those debts are incurred in the ordinary course of business.

These measures are aimed at giving a greater number of businesses a better chance to survive the pandemic-induced downturn. ASIC’s provisional insolvency statistics indicate that these measures, along with other subsidy measures, are having their intended effect. Creditor wind-ups and court wind-ups in August of this year were down a staggering 53.5% and 85.5% (respectively) as compared to in August of 2019. Overall, there was a 64% drop in companies entering into external administration in August of this year when compared to August of 2019.

The unfortunate reality is that many companies are unlikely to return to viability once the Federal Government’s various subsidy measures end. Consequently, insolvency practitioners should be prepared for a wave of insolvencies over the course of 2021, assuming subsidy measures are not extended or a new debt restructuring regime is not introduced.

Generally, many of these insolvent companies will have meritorious legal claims against third parties, and many creditors will have meritorious legal claims against directors or others. Given the prevailing economic conditions, creditors may be less willing to fund their own claims let alone fund the claims of the insolvent company. Lexvestor encourages liquidators, creditors and their lawyers to get in contact to discuss funding solutions to unlock the value of their (or their client’s) meritorious claims.