Covid 19

Covid 19 and Statutory Demands in Australia

As a result of the impact that the pandemic had on economic conditions in Australia, including the initial shutdown of the economy and subsequent ones as clusters emerged, the Australian government implemented a range of measures to provide temporary relief for financially distressed business.

One of the measures adopted related the operation of statutory demands, their thresholds at a time period for providing a response once served. Essentially, under the Corporations Legislation a creditor (whether a company, individual, trust or legal personal representative) can issue a statutory demand on a debtor company in respect of unpaid liquidated debts that are due and owing. If, after service of a statutory demand the debtor company fails to pay the amount of the debt specified in the demand itself that can be used as a presumption for the purposes of winding up the debtor company. Liquidated debts are different to contingent debts and claims for damages as they are certain. Naturally, the presumption as to insolvency can be rebutted in circumstances where there is positive evidence as to solvency. Generally, one of the requirements for a statutory demand is the need for there to be no genuine dispute about the existence or amount of the debt otherwise it is liable to be set aside by way of a court application (unless it is withdrawn beforehand).

The specific legislation enacted by the Australian government on 23 March 2020 was called the Coronavirus Economic Response Package Omnibus Act 2020 and it made various changes to the corporations legislation and subordinate legislation regarding statutory demands. More specifically, statutory threshold of $2000 was increased to $20,000 and the period for compliance with regards to the payment of a statutory demand was increased from 21 days to 6 months. Initially, these temporary measures were set to expire on about 24 September 2020 by reason of how the interpretation legislation applied to the definition of a calendar month.

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It goes without saying that the government was motivated to bring about these changes given a concern that a large number of small businesses (and perhaps even larger businesses) would be severely impacted by the restrictions imposed on trading. Obviously it is in the national interest to prevent companies from failing in the context of an unexpected event such as a pandemic if it is likely that during normal trading conditions with temporary financial difficulties can be avoided. There are also some consequences for creditors in allowing debt to companies to keep trading as it is quite possible some creditors will be left “holding the bag” when they would otherwise be able to place debtor companies insolvency. All in all most people consider, with the exception perhaps of some administrators who were looking forward to additional insolvency work, the response from the government to be appropriate.

Later, and on 7 September 2020 the Treasury announced an intention to extend some of the temporary relief measures with respect to statutory demands up until 31 December 2020. At the time of the announcement it was explained that these measures would be implemented by amending the regulations to the corporations legislation to effect the extensions. The changes to the statutory demands form part of broader measures which the Treasury explained included some 80 temporary regulatory changes made by the government to provide flexibility during this time of a national crisis.

The Corporations Regulations 2001 were accordingly amended so that part 5.4 explained that the “statutory minimum” in the relevant section of the Corporations Act 2001 was prescribed to be $20,000 and the “statutory period” was defined to be a period of 6 months with the regulation set to expire on 31 December 2020. Consequently, it is likely that will be increased activity on the insolvency front as the Australian economy approaches the end of the year. Unfortunately some businesses will not continue and it may be that as a result the creditors who had dealings with the failed businesses may end up in a position of recovery only some portion (or nothing) of the debts owed.

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With the approaching deadline for the temporary measures expiring in slightly more than a month from publication of this article, some law firms are trying to make it easier for debtors to issue statutory demands via technological solutions that create a statutory demand and affidavit template that is used as a precedent for the creditor to then finalise. Typically these technological solutions require users to enter details via a form and then the precedent is created through the technology and it is necessary to then customise it before it is ready. Whilst not perfect such solutions can be more cost effective than engaging a law firm that is likely to charge $400 (or more) per hour of work and even fixed costs solutions are likely to be more expensive.

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