Let's talk about debt, again...

Let's talk about debt, again...

In August 2020, we wrote about the approaching end to the Federal Government's moratorium on the initiating steps that a business can take to recover debt from another business through the creditor's statutory demand or bankruptcy notice processes.

As we foreshadowed, the moratorium has now been extended from 25 September 2020 to 31 December 2020, giving businesses that owe money more breathing space before their creditors can properly chase them for payment.

The Federal Government has also extended the temporary COVID-19 exemption for directors' liability for insolvent trading to 31 December 2020.

What does this mean if you have a business that is owed money by another business? It probably means you are going to have to wait longer to be paid. Until 31 December 2020, the efficient and cost-effective way of applying pressure for the payment of a debt, via a creditor's statutory demand or a bankruptcy notice, is more or less not available to your business.

Further, as long as your corporate customers incur debts to your business "in the ordinary course of [that] company's business", the directors of your customer are exempted from personal liability for that debt if your customer was in fact insolvent (unable to pay its debts) when the debts were incurred.

It won't be surprising if suppliers start insisting on cash on delivery terms, which stymies that part of our economy that relies on the provision of credit.

The Federal Government seems to be less concerned that, for every business that is not paying its debts, several businesses are not being paid the debts that are owed to them. Giving that one business the opportunity to resuscitate may well be strangling the cash flow of a number of other businesses (and the cash flow on which the families behind those businesses rely).

The Treasurer's press release on the extension of the moratorium contains this sentence (our emphasis in bold added):

"The extension of these measures will lessen the threat of actions that could unnecessarily push businesses into insolvency and external administration at a time when they continue to be impacted by health restrictions."

That ignores that sometimes it is necessary for businesses that cannot pay their debts to enter into some form of external administration in order to be saved. For example, a voluntary administration (VA) can allow companies that are insolvent, or likely to become insolvent, the breathing space to get advice and develop a plan to restructure their businesses, which can then be implemented through a deed of company arrangement. The Federal Government is not showing enough faith in the very mechanisms it oversees to deal with these situations.

Over the next three months to 31 December 2020, it would be refreshing to see the Federal Government work on a "lite" voluntary administration mechanism (VA-lite) to allow small and medium enterprises the ability to utilise the VA process to restructure and recapitalise with the assistance of a qualified and registered insolvency practitioner, but without that practitioner being required to thoroughly investigate, and report to creditors and ASIC on, the affairs of the company and the causes of its then situation.

Such a VA-lite mechanism can give distressed businesses "the necessary flexibility to restructure or to wind down their operations in an orderly manner", which the Treasurer's press release sets as a goal for when the economy starts to recover.

Author: Keiran Breckenridge, Special Counsel

Our team is actively monitoring and considering the implications of legal and regulatory developments in response to the COVID-19 pandemic. You can find our COVID-19 collection here.

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