Almost one year ago in response to the Covid 19 epidemic, the Australian Federal Government lifted the threshold for a creditor to issue a bankruptcy notice from $5,000 to $20000. The raised threshold was always intended to be a temporary measure to assist individuals and businesses navigating through uncertain times and for some the dramatic contraction of their sector.
With similar effect, the threshold for a creditor to issue a statutory demand increased from $2,000 to 20,000 with the timeframe for a response extended from 21 days to six months.
An initial concern with this move was that creditors may manage non-payment through harsh credit terms and shorter repayment periods. Additionally, the cost of directing corporations and debtors through the bankruptcy and liquidation process was seen to be exorbitant during a period where it is preferred (at least by the government) that capital be directed to sustain business through an uncertain period.
Even before the pandemic hit our shores there has been an effort by the Australian Banking Association and other consumer groups pushing the government for a review to raise the bankruptcy threshold amid concerns of assertive action taken by the collection agencies.
Thankfully, with the Australian economy slowly emerging from hibernation, the minister for industrial relations permanently lifted the threshold to $10,000 on 1 January 2020.
The artificial reduction in bankruptcies prompted by the government’s actions are also accompanied with the Department reducing the exclusion period for individuals who have been declared bankrupt down to one year.
This is done to encourage sole traders to re enter the workforce and start new business activities. This is nothing new. the idea was first flouted to the Turnbull government back in 2017 upon a recommendation by the productivity commission.
The proposal stems from an amendment to the 1986 insolvency act in the United Kingdom which reduced the duration of bankruptcy from 3 years to 1. Although the reduction is designed to encourage bankrupts to re-enter business, it should be treated with some caution here in Australia. In the UK a bankrupt’s status is removed only 3 months after discharge. In Australia, the individual insolvency register lists their bankruptcy indefinitely.
Regardless though, the concerns of the business community appear to be addressed where the commission recommended that the court or a trustee retain the power to extend the period to up to eight years.
To sum up, the predominate concern with the easing of the thresholds is that it arrives at a time when the Reserve Bank has forewarned of a rise in corporate insolvencies and business failures. This comes at a time where the governments income support comes begins to taper off and businesses begin to re-adjust to a different economic climate.
