Statutory demands and winding-up petitions in debt recovery are due to return to full force in September
One of the most powerful debt recovery tools is the issuance of a statutory demand with the threat of winding-up proceedings. In the wake of the economic impact of the COVID-19 pandemic, to avoid a huge number of corporate insolvencies, the Federal Government legislated changes to the statutory demand regime which made it more difficult for creditors to enforce their debt and get paid (COVID-19 Changes). These legislated changes are currently due to end on 24 September 2020.
This article looks at how statutory demands, coupled with the threat of winding-up proceedings, can be used as a debt recovery tool to get paid. It will also consider what creditors should be doing now to pursue their debts, and what debtor companies who might not recover from the economic impact of COVID-19 should be thinking about.
In previous articles, we have considered the implications of other Government COVID-19 stimulus measures ending, including JobKeeper and the suspension of directors’ personal liability for insolvent trading.
What is a statutory demand?
A statutory demand is used by a creditor as a formal demand for payment of a debt. For example, a statutory demand can be used where a creditor has issued an invoice, and that invoice has not been paid within the agreed payment terms. Failure to comply with a statutory demand can lead to a company being wound-up, which is why the use of statutory demands is so potent in debt recovery.
Requirements to issue a statutory demand
To issue a statutory demand, before the COVID-19 Changes which are currently due to expire on 24 September 2020, the debt had to be:
- due and payable; and
- at least $2,000.
There are several other formal requirements which must be complied with when issuing a statutory demand. Failure to comply with these requirements may render the statutory demand defective, and the sender liable to pay the costs of the recipient for having it set aside by a Court. You should seek legal advice before issuing a statutory demand.
What happens if a company fails to comply with a statutory demand?
Before the COVID-19 Changes, if, within 21 days of service, the debtor failed to make payment or apply to have the statutory demand set aside, the debtor company was presumed to be insolvent. This presumption of insolvency, subject to evidence to the contrary, could lead to the debtor company being wound-up.
It is this presumption of insolvency, and the possibility of being wound-up, that gave statutory demands their teeth and made them a very effective tool in corporate debt recovery.
What are the COVID-19 Changes to statutory demands?
The COVID-19 Changes made debt recovery for creditors harder because they temporarily changed the legislation relating to statutory demands by:
- substantially raising the threshold for the minimum amount owed from $2,000 to $20,000; and
- giving debtor companies much more time to respond to the statutory demand. Previously, they had to respond within 21 days (and the Court did not have the ability to extend the time frame); now they have six full months to respond.
The COVID-19 Changes only apply to statutory demands served on the debtor company during the six-month period in which the temporary measures operate: 25 March 2020 to 24 September 2020.
How does the response time work in practice?
Assuming there is no extension to the current COVID-19 Changes:
- If a statutory demand is served between 25 March 2020 and 24 September 2020, the debtor company has six months from receipt of the demand to respond
- If a statutory demand is dated and was posted before 25 March 2020, but is (or was) not served on the debtor company until after the commencement of the COVID-19 Changes, the temporary measures apply and the debtor company has six months to respond: see Sunstate Land Pty Ltd v Hiview Design & Construction Pty Ltd QSC 181
- If a statutory demand is served after 24 September 2020, the debtor company has 21 days to respond.
When should a creditor issue a statutory demand in the light of the COVID-19 Changes?
From a creditor’s point of view, it makes more sense to wait until the end of the COVID-19 Changes to issue a demand. If they were to issue a statutory demand now in July 2020, the debtor company would have until January 2021 to respond. If they issue it on 25 September 2020, the debtor company has until 16 October 2020.
What will happen after 24 September?
Some creditors (those who are owed less than $20,000) have had to hold off issuing statutory demands due to the higher temporary threshold. Others might have chosen not to call in debts out of goodwill and a sense that ‘we’re all in this together’. Still, others are merely waiting for the longer response period to lapse.
On 25 September 2020, the thresholds will revert to where they were prior to March and creditors can issue statutory demands for debts over $2,000 and debtors will have just 21 days to respond.
Once the COVID-19 Changes end, we are likely to see a dramatic increase in the number of statutory demands which are issued. If the debts are not paid, we can expect creditors to start winding-up proceedings.
What should directors of an indebted company do to prepare for September?
Waiting until September to formulate a plan is not an option. While Treasurer Josh Frydenburg has signalled a possible extension of the temporary measures, it would be foolish to rely on this coming to pass.
If you know that you have outstanding debts, or that there may be creditors lurking in the wings, it is vital that you address the problem now. Delaying the inevitable will mean you have far fewer choices available to you when the temporary measures cease.
Undertake an honest reckoning of your debts and income. Include both statutory demands that have already been issued, and those which you can reasonably predict will be issued after the temporary measures cease.
Consider how you will respond if a statutory demand is served in relation to any of them.
- Is there a genuine reason you could rely on to dispute the debt?
- Do you have a reciprocal claim that could offset the debt? For example, if the creditor is a supplier, did they fulfill their part of the contract?
- Do you have a reasonable expectation that your revenue will increase substantially in the near future? If so, you may be able to negotiate a longer forbearance from your creditors. If you can show them compelling evidence, they might agree to hold off issuing a statutory demand, but the sooner you enter negotiations the better. Remember, after the COVID-19 Changes end, you only have 21 days to respond to a statutory demand, which is not enough time to benefit from a second-quarter increase in revenue.
If you do not think you will be able to meet your debt burden, you might want to consider voluntary administration. We have previously discussed why opting for voluntary administration can offer a path forward for directors of a distressed company. Doing so earlier rather than later gives you a wider range of options and improves the possibility for the ultimate survival of your business.
Speak to a lawyer or insolvency practitioner to discuss the options available to your company.
What should creditors do to prepare for September?
If you are owed money by another company, think strategically. By issuing a statutory demand now, the debtor company will have six months from receipt to respond. By waiting until 25 September 2020 to issue a statutory demand, the response time will be significantly shorter. But, in the meantime, you should consider issuing a letter of demand and possibly restructuring the debt owed to you – this might include taking some form of security against assets of the company and or obtaining a personal guarantee from one or more of the company’s directors.
Creditors might also have other rights, including:
- The right to charge default interest
- The right to possession of assets held by the debtor
- The right to terminate the contractual relationship
- The right to appoint a receiver over the property of the debtor company
The options available to a creditor will depend on the nature of the relationship and the contract. Seek advice from your legal adviser as to your options.
Creditors may also pursue alternative debt recovery processes through the Court now. The COVID-19 Changes apply only to statutory demands under the Corporations Act 2001 (Cth). A creditor may still initiate a claim in the Court seeking judgment for the debt, and this may be necessary if there is going to be a factual dispute as to whether the debt is owed. Once judgment is obtained in your favour, it can be enforced through a range of measures including (but not limited to):
- a levy against property
- attachment or garnishment of debts owed
- charging and stop orders
What does this mean for you?
As a debtor company, the decisions made now will determine whether the business is sustainable in the future. By being proactive about existing and future debts, you can try to negotiate with creditors or explore other ways to restructure your business and increase the chances of its ultimate survival.
As a creditor, considering your options now – including the possibility of negotiating with debtors to restructure the debt – will increase the likelihood of being paid.
For more information about how to prepare for the end of the suspension of insolvency laws, please contact:
Trevor Withane: email@example.com, tel +61 (0)418 717 001