Trade Credit Update | A guide to transitioning out of temporary relief against statutory demands

Trade Credit
The Coronavirus Economic Response Package Omnibus Act 2020 (the Omnibus Act), specifically Schedule 12—Temporary relief for financially distressed individuals and businesses, came into effect on 25 March 2020 and contained several temporary measures designed to support the Australian economy in response to the COVID-19 pandemic.

Relevantly under the temporary measures:

  • a creditor may only serve a statutory demand in respect of a debt that is at least $20,000 (previously $2,000); and
  • a debtor company has six months to respond to the statutory demand (previously 21 days).

Each temporary measure was initially due to end in three weeks on 25 September 2020 and only applies to statutory demands served on a debtor company during the 6-month period (i.e. 25 March to 25 September 2020), as of 7 September this has been extended to 31 December 2020.

After 31 December 2020, assuming it is not further extended, we will almost certainly see an increase in the issuance of statutory demands as creditors seek to recover debts that have remained unpaid and continued to accrue during the COVID period. The reversion to the original thresholds (i.e. only 21 days to respond) will also likely lead to an increase in the number of insolvencies across the market, especially at the SME level, as creditors approach the court to have liquidators appointed. The current statistics present the temporary measures have decreased the number of formal insolvencies since March however this will likely increase rapidly in Q1 2021.

For the July - August 2020 period compared to July - August 2019, the data presents a significant reduction in the number of reported events.

  1. Winding up Applications are down by 89%. The ATO did not file any winding up applications in July or August 2020; 
  2. Court Liquidations are down 74%; 
  3. Voluntary Administrations are down 66% after adjusting the figures to record multiple companies in a group as a single appointment;
  4. Voluntary Liquidations are down 37%.

Winding up applications and court liquidations Aug 2019 -Aug 20

TIME FRAME

  • If a creditor serves a statutory demand on a debtor company on or before 31 December 2020, the debtor company will have six months to respond to the statutory demand.
  • If a creditor serves a statutory demand on a debtor company immediately after the temporary measures are repealed, the period for the debtor company to respond to avoid a presumption of insolvency will revert to the previous 21 day period. 

DEBTOR ADVICE

Directors of a debtor company will need to be wary of the impending end to the temporary statutory demand regime and to plan accordingly. Directors need to review their trade creditors, and consider which debts may become the subject of a statutory demand, the ability for the statutory demand to be set aside or proposed repayment plans with creditors.  This might include considering if:

  • your supplier has a genuine dispute about the debt;
  • your company has an offsetting claim to the debt if demanded by the creditor;
  • if a statutory demand is served, the demand is compliant with the temporary regime (if applicable), i.e. what date was it served and for what amount; or
  • if the likely level of debts are insurmountable, whether the directors should consider appointing administrators. 

CREDITOR ADVICE

Creditors who are considering serving a statutory demand need to be conscious of the date that the temporary regime ends to avoid inadvertently becoming subject to the six-month response period. 

By serving a statutory demand during the period, a first moving creditor may disadvantage themself against a creditor who subsequently serves on the debtor company after the temporary measures end on 31 December 2020.

Outlined below is some more general commentary on statutory demands. 

WHAT IS A STATUTORY DEMAND?

A statutory demand is a document served by a creditor on a debtor company which requires the repayment of debt owed. The demand must only be issued in relation to a debt which is due and payable (section 459E(1)(a) of the Corporations Act 2001 (the Act)). The debt cannot be contingent or prospective. There must be certainty of the amount claimed. The debt or debts claimed in the statutory demand must total at least the statutory minimum (section 459E(1) of the Act), which as noted above is presently $20,000, which will revert to $2,000 on 1 January 2021, unless extended.

Statutory demands are highly prescriptive and a failure to comply with the prescribed statutory form when drafting and serving the demand may invalidate it. In addition to the requirements above, it must:

  • be in writing;
  • be signed by or on behalf of the creditor;
  • correctly state the debtor’s company name and its registered office; and
  • specify a place in Australia where the debt can be paid.

CONSEQUENCES FOR FAILING TO COMPLY

The consequence of failing to comply with a statutory demand or have it set aside by a Court is that a presumption of insolvency arises. The overall purpose of a statutory demand is to prevent insolvent companies from continuing to trade by delaying payment to creditors and to stop companies from incurring further debts. Statutory demands also provide an avenue through which a creditor is able to apply to the Court to wind up a company if the company has failed to respond to the statutory demand or make payment of the amounts demanded.

Claims for unliquidated damages are not debts unless a judgment or settlement amount has been ordered, and prospective future liabilities are also not considered debt within the solvency test of s 95A of the Act as solvency depends on debts as and when they become payable. 

ASSIGNMENTS OF DEBTS

The Courts have ruled that an assignee of a debt can issue a valid statutory demand provided the demand itself contains sufficient information evidencing the assignment. This is worth reinforcing in light of the potential for increased assignments of debt that have occurred during COVID.

DEFENDING STATUTORY DEMANDS

A company may choose not to respond to a statutory demand and await winding up proceedings in order to dispute the solvency of the company if it chooses, however companies must be aware that by doing so, the onus to disprove the insolvency of the company rests with the company. The alternative is to respond to the statutory demand as soon as possible in an effort to settle the amount owing with the creditor, or perhaps enter into an instalment arrangement. The creditor is under no obligation to accept a settlement or an alternative arrangement for payment to be made, however it might assist cashflow. 

Conversely, a statutory demand can be defended by the company in the following circumstances, under s 459 of the Act:

  • if there is a genuine dispute to the debt;
  • if the company has an offsetting claim to the debt demanded by the creditor;
  • if there is a defect to the demand which would result in substantial injustice to the company; or
  • some other reason.

By doing so, the company must have a genuine dispute, and the grounds for disputing must be tangible. For example, arguing potential future cashflow of the company would deem the company solvent is likely to be considered an insufficient defense.

LOCKTON SUPPORT

Lockton and our partners are available to provide support and guiance to our clients as we transition through this challenging time. Please feel free to reach out to one of the team: 

Liam Berry
National Manager

Trade Credit, Surety & Political Risk 

0481 438 374 
liam.berry@au.lockton.com

Dean Jenkins
National Manager

Trade Credit, Surety & Political Risk 

0423 921 451
Dean.jenkins@au.lockton.com

Maha Awada
Manager

Trade Credit, Surety & Political Risk 

0466 559 904
Maha.awada@au.lockton.com


 

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