The temporary amendments to the insolvency regulations saw a substantial decrease in the number of Australian businesses entering external administration during the COVID-19 induced economic recession, in comparison to the preceding two decades. This is largely a result of the amendments allowing Australian businesses more time to manage debts. However, with the temporary amendments coming to an end on 31 December 2020, an external administration wave is expected to hit several Australian businesses as statutory demands can be made for debts as minimal as $2,000 and the compliance timeframe returning to 21 days.
A statutory demand is a formal, written request by a creditor demanding a company to pay a debt pursuant to section 459E of the Corporations Act 2001 (Cth) (Corporations Act).
The purpose of issuing statutory demands is to:
- receive payment of a debt that is not in dispute; and / or
- prove the insolvency of a company.
- is designed to discourage insolvent businesses from continuing trade and acquire further debts which it will be unable to pay; and
- provides a method of establishing the insolvency of a debtor company and for the winding up of that company.
It is well-established in Australian case law that statutory demands are not intended to be used for debt collection, and should therefore only be utilised as a final attempt by a creditor to recover unpaid debt.
The time in which an entity has to respond to a statutory demand is 21 days (Statutory Period). If the company does not respond within the prescribed timeframe, it will be presumed to be insolvent, and the creditor may apply to the court to wind up the company.
PANDEMIC RELIEF COMING TO AN END
In response to the Coronavirus pandemic, the Australian Government enacted the Coronavirus Economic Response Package Omnibus Act 2020 (Omnibus Act) which provided several temporary measures. Under the temporary measures, creditors may only serve a statutory demand on debts exceeding $20,000 (an increase from the former statutory minimum of $2,000), and the Statutory Period was increased from 21 days to six months.
Initially, the Omnibus Act was intended to be in effect for six months from 25 March 2020. However, in late September, the enactment of the Corporations and Bankruptcy Legislation Amendment (Extending Temporary Relief for Financially Distressed Businesses and Individuals) Regulations 2020 (Cth) (Temporary Extension Regulations) extended the duration of the amendments to 31 December 2020. Without anything to indicate otherwise, the statutory demand regime will revert back to its pre-pandemic criteria.
A recent report predicted that the Federal Government’s relief regime, including the extensive economic stimulus package, has seen approximately 5,800 businesses avoid external administration. However, the report has also forecasted “a wave” of businesses entering into external administration from 2021 onwards as the relief ceases causing “zombie” businesses (businesses that would be insolvent if not for the government’s stimulus measures) and businesses suffering from genuine pandemic-related financial issues to collapse.
Statutory demands will become more frequently used in the next calendar year. To ensure your business is adequately protected against the incoming wave, act quickly. Contact Aaron McDonald today by clicking here or call us (08) 6188 3340.