The government has extended its relaxation of the insolvency rules, despite a call from some industry participants to get the system back to normal.

Treasurer Josh Frydenberg announced yesterday that temporary insolvency and bankruptcy protections, which were to end this month, will be maintained until December 31.

In March, the Treasurer introduced a number of temporary measures, including:

• the minimum threshold for creditors issuing a statutory demand on a company under the Corporations Act rose from A$2000 to $20,000;

• the timeframe for a company to respond to a statutory demand was extended from 21 days to six months;

• directors were temporarily relieved of their duty to prevent insolvent trading with respect to any debts incurred in the ordinary course of a company’s business;

• the threshold for the minimum amount of debt required for a creditor to initiate proceedings against a debtor increased from $5000 to $20,000; and

• the time a debtor has to respond to a bankruptcy notice was increase from 21 days to six months.

Frydenberg said in a statement yesterday: “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.”

Last week, a group of insolvency industry participants urged the government not to extend the relaxation of the insolvency rules beyond this month, arguing that the COVID-19 relief measure is causing a domino effect of failing businesses.

A paper issued by the Australian Restructuring, Insolvency & Turnaround Association, the Australian Institute of Credit Management and commercial credit bureau CreditorWatch said: “Too many businesses are not paying their bills. Companies that should be in liquidation are continuing to trade and are threatening the livelihood of otherwise solvent businesses.

“The government’s measures were well-intentioned but they have produced serious unintended consequences.”

The chief executive of Australian Restructuring, Insolvency & Turnaround Association, John Winter, said: “Insolvent businesses are running even higher debts, costing creditors even more money. When they are eventually and necessarily wound up, there will be less than nothing left for creditors, likely putting those creditors at risk of collapse.”

Others support the government’s move. The Australian Small Business and Family Enterprise Ombudsman, Kare Carnell, conceded that the extension would keep a number of “zombie businesses” afloat artificially.

However, she said: “These measures give otherwise viable small businesses more time to recover, preventing a wave of unnecessary insolvencies.”