Covid-19: Relief for Debtors
I have debts, what are my options?
When faced with a claim by a creditor that you owe them an unpaid debt your options, generally are:
- Pay the debt in full;
- Negotiate a reduction and/or payment plan;
- As part of this, you may propose items including security (mortgages, charges, liens etc) and/or third party guarantees;
- If the debt or a portion of it is genuinely disputed, communicate the reasons why and/or invoke alternative dispute resolution procedures or approach regulatory bodies that may be available;
- Go to Court (i.e. to seek a declaration – e.g. that the debt doesn’t exist);
- Invoke procedures that may be available to you under the Corporations Act or Bankruptcy Act;
- Do nothing (however, this may result in adverse outcomes should the creditor take the matter further, involving amongst other things, adverse listings on your credit file, judgment debts, winding up or bankruptcy proceedings etc).
Other Tips
Be Careful with Open Correspondence (i.e. not marked “Without Prejudice”)
It is wise (unless it is your intention to do so) to not admit in open correspondence that you cannot pay your debts as and when they fall due, or that you are suspending payment of debts owed to creditors generally. If you do, creditor/s may be able to simply bypass the statutory demand or Bankruptcy Notice procedure (i.e. presumption of insolvency following any non-compliance or other action thereto) and apply for a winding up (of a company) or a sequestration order (of an individual) in reliance on your correspondence alone.
If you are at all unsure about how and when you can properly use the “Without Prejudice” legal concept and associated principles, please obtain legal advice.
Don’t let creditors squeeze you and always obtain legal advice if you are entering into a binding agreement
Whilst it may sound obvious, do not agree to any compromise that leaves you worse off than you were to begin with.
“Buying time to pay” can be very expensive.
If you are making any concession (e.g. that the debt is owing (in part or whole), that you need more time to pay, that you are unable to pay your debts as and when they fall due – i.e. you are insolvent)) you should be aware that these concessions may be used against you later and you should very clear about what you are getting in return for that concession. If you are contemplating signing a Deed of Settlement and Release or any other similar document you should always read the document very carefully and seek legal advice about the effect of that document before signing it.
Further, the content of your texts and emails can in certain cases be held to constitute a legally enforceable agreement, so be careful in your communications. For further information on how to avoid being bound prior to a final agreement, see our recent article.
If you dispute a debt, be very careful about agreeing to any kind of compromise that limits your ability to challenge the debt at a later date.
Often creditors will write to a debtor and propose a payment plan. If the debtor responds and agrees to the terms/ proposes a different payment plan which is accepted by the creditor, they can later be found to have ‘admitted’ the debt and be precluded from disputing it.
Further, borrowing from new/mezzanine/caveat lending/short term finance providers to pay out existing creditors can often be financially detrimental to the debtor. You should obtain financial advice from a qualified person before resorting to this option.
Be wary of scams/ non-financial counsellors
In a similar vein, unfortunately there are unscrupulous operators who target people who are experiencing problems with debt. Be cautious with any kind of unlicensed fee charging debt management provider.
These consultants often charge high fees for little or no benefit to the debtor. They are often unlicensed (no AFSL or ACL) despite often appearing to provide services that require a licence from ASIC.
The services of a financial counsellor are available for free.
Don’t engage in illegal phoenix activity
It is unfortunately common for debtors to resort to illegal phoenix activity as a “way out”.
There are many ways for this to occur. Often businesses and/or their directors experiencing financial distress will either receive unsolicited contact or be lured by the apparent attractiveness of quick/easy fixes on the Internet from advisors of different sorts offering their services. It is crucial to look into the background and professional associations of any person proposing this kind of activity.
If you engage anyone to advise you regarding issues arising from a failing business, they should be an insolvency practitioner, accountant or lawyer, and they should have the relevant professional qualifications and memberships.
If at any time you are transferring assets away, you should ensure that you receive full market value or the best value for the assets. Transferring the assets for no value or at an undervalue, is a hallmark of so-called “phoenix” activity whereby individuals seek to avoid the consequences of insolvency by spiriting away items of value. “Phoenix” activity that defeats legitimate debts is illegal and can result in the transaction(s) being set aside and civil and/or criminal liability for those involved. If you have any concerns regarding potential “phoenix” activity, you should immediately seek legal advice.
The COVID-19 crisis
Notwithstanding the above, there are very unique options currently available to debtors – during the COVID-19 crisis.
These are often specific to the nature of the debt or creditor involved.
For instance:
- Consumer credit: i.e. mortgages/ motor vehicle finance etc (Hardship provisions):
- Many people believe that the existing reprieve being offered by the banks solely concerns residential mortgages. This is not true;
- Relief is available under any form of credit contract governed by the NCCP Act. Should a debtor qualify under those circumstances, they would be able to apply for: an extension of the period of the contract and reduction of payments accordingly, the postponement of payments during a specified period, or extending the period of the contract and postponing the date of due payments.[1]
- The existing COVID-19 deferrals or “repayment holidays” are in addition to the hardship provisions. They are not uniform or regulated/compulsory, but the Australian Bank Association has announced that member banks would be further extending eligible customer’s deferrals to the end of March 2021.
- Tenants:
- Issues with rent and renters arose early in the COVID-19 pandemic, and have continued throughout the economic downturn. A Mandatory Code of Conduct was introduced earlier this year for retail, office, and industrial leases between owners, operators, landlords and tenants.[2] This measure was made law in NSW with the Retail and Other Commercial Leases (COVID-19) Regulation 2020 (NSW) enacting legislative requirements under the Retail Leases Act, as well as the Residential Tenancies Act;
In the commercial/retail lease arena:
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- For tenants who are either eligible for JobKeeper, or are a small to medium sized business with an annual turnover of up to $50 million, the code includes:
- a restriction on the termination of leases for non-payment of rent during the pandemic and a reasonable recovery period;
- that landlords must offer reductions in rent (such as waivers or deferrals) based on the tenant’s reduction in trade during COVID-19.
- For tenants who are either eligible for JobKeeper, or are a small to medium sized business with an annual turnover of up to $50 million, the code includes:
In respect to residential tenancies:
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- Pursuant to the Residential Tenancies Amendment (COVID-19) Regulation 2020 (NSW), for six (6) months commencing 15 April 2020, COVID-19 impacted tenants cannot be evicted unless the landlord has taken part in good faith negotiations in regards to rent reductions. A tenant is considered to be COVID-19 impacted for the purpose of the regulation if one or more members of the household has lost employment, had to stop working or reduce working hours due to the impact of COVID-19 and household income has been reduced by 25% or more as a result. Tenants are also entitled to increased notice periods and have protections against financial penalties for terminating their lease early if they are COVID-19 impacted. If you are a tenant experiencing hardship because of the COVID-19 crisis, you should contact the Tenants’ Union of NSW.
- ATO debt:
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- The ATO is currently considering low interest payment plans and remitting interest and penalties applied to businesses who are affected by the COVID-19 crisis. You will need to discuss your particular circumstances with the ATO and more details are available here.
- There are also increases to the thresholds for instant asset write off, accelerated depreciation and tax credits which may be available for certain businesses. More details are available here.
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- Directors of companies:
- Directors of companies have been provided with temporary reprieve from insolvent trading laws. This protection was introduced on 23 March 2020 and significantly expands protection for directors against the risk of insolvent trading claims when debts are incurred “in the ordinary course of the company’s business.”[3] According to the explanatory memorandum of the Coronavirus Economic Response Package Omnibus Act 2020, the “ordinary course” includes adaptation to the unique circumstances posed by COVID-19 during the operation of this reprieve, including taking out a loan to move a business online, or to continue to pay employees.[4] Initially scheduled to last for six (6) months until 23 September 2020, this measure can be, and is likely to be extended by regulation, should the government form the view it is necessary in order to protect the Australian economy from the shock caused by mass-liquidations.
- ATO stimulus:
- Small and medium sized businesses as well as not-for-profit organisations were eligible for stimulus from the ATO during the March to June 2020 period, equal to 100% of the amount withheld on tax on salary and wages, up to a maximum of $50,000. For those not required to withhold tax, receiving a minimum payment of $10,000. This payment was continued between June and October 2020, for an amount equal to that received by eligible employers to 30 June 2020. This resulted in eligible businesses receiving in total between $20,000 and $100,000 under both payments. Payments are calculated and paid automatically by the ATO.
Finally
With various options available to you and other forms of relief under the law (i.e. increased thresholds to statutory demands/bankruptcy notices and time periods to comply) you may be able to successfully survive through these unprecedented times.
Further, those seeking to pursue you for debts should be wary that many of the avenues for relief are currently non-functional and will likely remain non-functional with extensions to COVID-19 protection measures. In the alternative, negotiation in order to make progress on settling debts to the extent that you are able should be pursued.
The reprieve will only be temporary. At a certain point in time, the stimulus and other protective measures will be wound back and it is expected that insolvencies will rise.
Accordingly, now is the time to negotiate and/or explore your options. If you need assistance understanding how to apply for, or make best use of the various COVID-19 protections and measures to assist your business, please contact Gavin Parsons & Associates on (02) 9262 4471 to book a free consultation and discuss how we can assist you.