Under temporary new Australian laws relating to corporate debt collection, creditors still have the right to enforce debts through the courts but the thresholds have changed. In response to the economic fallout from the coronavirus pandemic, the new laws will remain in place for the next six months, with the option to extend to a year.
As of 23 March 2020, amendments to the Corporations Act 2001 (Cth) and the Bankruptcy Act 1996 (Cth) allow the following temporary relief for companies in financial distress:
- The statutory minimum debt is increased from $2,000 to $20,000.
- The statutory period to comply with a statutory demand is extended from 21 days to six months.
- Safe harbor for company directors from any personal liability for trading while insolvent.
- The minimum amount of debt required for a creditor to initiate bankruptcy proceedings is increased from $5,000 to $20,000.
Creditors can still pursue unpaid invoices
Creditors can still pursue pre-legal collections as before. In fact, a business’ internal accounts receivable process should be more robust than ever in these uncertain times. Now is the time for a business to review its credit policies and the credit terms it extends to customers. In another article, we’ll cover options for businesses when your customers stop paying their invoices during the COVID-19 pandemic. In the meantime, you can register for our upcoming webinar:
WEBINAR: WHAT ARE YOUR OPTIONS IF YOUR CUSTOMERS STOP PAYING THEIR INVOICES?
Date: Wednesday 15 April 2020
Time: 11.30 a.m. to 12.30 p.m. AEST
How to join: Via Zoom
What are statutory debts and statutory demands?
A debt is considered statutory if it is due and payable to a creditor and is claimed by the creditor under a statutory demand. The debt cannot be prospective, contingent or unliquidated.
Due to the Australian Government’s Coronavirus Economic Response, the statutory minimum debt is now $20,000.
The revised statutory minimum debt of $20,000 only applies to statutory demands that are served on or after the commencement of the temporary changes and only while the temporary laws are in place.
Under the Corporations Act, a statutory demand must be in writing and in the correct form: Form 509H.
A Form 509H is a written demand for payment sent by or on behalf of the creditor to the debtor company. It must include relevant information and be delivered according to the requirements of the Corporations Act. This is because the Courts can order a company into liquidation if it does not meet the statutory demand, so the Courts must be satisfied that the initial statutory demand was lawful.
A single statutory demand can include the total debts owed to the creditor and how the debts were incurred by the debtor company.
Among other criteria, the statutory demand must ensure the following:
- is in writing;
- be signed by on behalf of the creditor;
- state the total amount of debt due and payable on the date of the demand;
- includes the debtor’s company name and its registered office.
- includes an Australian location where the debtor company can pay the debt e.g. the creditor’s office or a solicitor’s premises.
- must be supported with a judgment of the Court or an affidavit
- is left at or posted (not emailed) to the debtor company’s registered office or a copy delivered personally to a company director who resides in an Australian territory.
Due to the compliance requirements, a creditor company will usually ask a solicitor to prepare and issue a statutory demand on its behalf.
Responding to a statutory demand
Time is critical for a debtor company once it has been served with a statutory demand.
The statutory period to comply has changed due to the Australian Government’s Coronavirus Economic Response.
From 23 March 2020, the statutory period to comply with a demand is extended from 21 days to six months.
A debtor company may choose a number of actions after receiving a statutory demand:
- Pay the creditor the amount in demand.
- Seek to set aside a statutory demand that is accompanied by an affidavit.
- Seek to set aside a statutory demand with a judgment.
A debtor company that seeks to set aside the statutory demand must be able to provide the Court with satisfactory evidence that there is a genuine dispute, they have an offsetting claim, the demand has formal defects, or there is another valid reason.
If a statutory demand is set aside by the Courts, there is no further legal effect of the demand and the Court may issue costs against the issuing creditor.
What is safe harbour from insolvent trading?
When a company has no capacity to pay back its debts when they are due, company directors have a personal responsibility to enter an insolvency procedure such as voluntary administration or liquidation.
The new temporary laws allow company directors to knowingly continue trading and incur debt even if the business is unable to pay its debts when they are due. Any debts incurred by the company will still be payable, once economic conditions improve.
The new laws are intended to support businesses to continue to trade with purpose where possible through the Coronavirus crisis with the aim of returning to viability afterward. Directors are not relieved of their fiduciary, care and diligence responsibilities and must take care to fully understand their director responsibilities before, during and after the Coronavirus pandemic. Companies that undertake dishonest or fraudulent practices will still be subject to criminal penalties.
An increase to bankruptcy thresholds
Bankruptcy refers to personal, not company, insolvency. Under temporary changes to the Bankruptcy Act 1996 (Cth), the creditor can initiate bankruptcy proceedings against a debtor when the minimum amount of debt is $20,000.
A debtor now has six months (up from 21 days) to respond to a bankruptcy notice filed against them. Creditors retain the right to enforce debts against companies or individuals through the courts.
Planning for the future
The breathing space offered by the temporary relief measures is designed by the Australian Government to allow businesses more time to consider their recovery plans after the Coronavirus crisis. The government hopes that the safety net of extra time and lessening the threat of court actions will support otherwise viable businesses to resume normal business operations instead of pushing them to insolvency.
Read Treasury’s Fact Sheet: Temporary relief for financially distressed businesses
Read the ATO’s advice: Boosting cash flow for employers
Throughout the Coronavirus pandemic, ezyCollect is offering new users 2 months free use of the entire accounts receivable platform to help businesses recover outstanding invoices and mitigate credit risks.