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Fears raised on relaxed insolvency laws extension
Concerns have been raised over the federal government’s extension of temporary insolvency emergency measures into 2021.
Tony Zhang
The joint announcement, made by the Treasurer and the Attorney-General, proposed extending the temporary increase in the threshold at which creditors can issue a statutory demand, extending temporary bankruptcy protections, and extending the temporary relief for directors from any personal liability for trading while insolvent.
However, drawing on the recommendations of the insolvency & restructuring committee (committee) of the business law section of the Law Council of Australia, Ms Wright urged the government to carefully review all temporary insolvency emergency measures before extending them beyond 31 December 2020 in order to avoid unintended consequences.
“Delaying steps that would otherwise lead to the liquidation of unviable businesses exposes more viable businesses to becoming substantial creditors of those unviable businesses. This has the potential to spread the contagion, making the eventual insolvency wave more widespread and difficult to resolve,” Ms Wright said.
Emergency measures to prevent a wave of pandemic business failures have been extended until the end of the year, but this has fueled fears over so-called “zombie firms”.
Hamilton Locke partner Nick Edwards previously told Lawyers Weekly that the government’s decision – “albeit not unexpected” – simply continues to disincentivise action for distressed businesses and continues to put pressure on those who deal with such distressed businesses, including suppliers, creditors and landlords.
CreditorWatch’s latest research has shown late payment periods between businesses have lengthened to 43 days, meaning businesses are now taking 2.9 times longer to get paid.
Despite a lack of cash flow, business administrations have fallen by 59 per cent compared with the average in 2019.
CreditorWatch chief executive Patrick Coghlan stated that the decision would “heap a huge amount of pressure” on creditors and allow business owners to rack up unsustainable levels of debt.
“The extension provides a lifeline for thousands of businesses on the edge of collapse, but it will also see more taxpayer money thrown at businesses that have little chance of recovery,” he said.
Ms Wright added that the temporary emergency measures and all other relief being afforded distressed businesses during the current pandemic will eventually be removed.
“When that happens the insolvent entities that remain will likely be so bereft of assets or possible recoveries that external administrators – who themselves generally conduct small business enterprises – may be reluctant to take on the arduous tasks of liquidating insolvent entities,” she said.
“Furthermore, extending the inevitable commencement of liquidations and bankruptcies allows even more time to pass from the date of otherwise potentially voidable transactions, thus increasing the opportunities for pre-insolvency advisers to assist in structuring of an insolvent entity’s affairs to defeat the claims of creditors. Such prolongation could give rise to illegal phoenix activity.”
