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In response to the COVID-19 pandemic, changes have been made to the Corporations Act in order to provide temporary relief for financially distressed businesses. 

Co Program Director of the Master of Laws in Enterprise Governance and Honorary Adjunct Professor Stephen Van Der Mye explains what changes have been made and how it affects financially distressed businesses. 

Written by Co Program Director of the Master of Laws in Enterprise Governance and Honorary Adjunct Professor Stephen Van Der Mye

Background

Section 459E of the Corporations Act 2001 (Cth) (herein after referred to as the Corporations Act) sets out details of how a creditor may serve a statutory demand on a company.

A statutory demand can be a useful way to put pressure on a company to pay its debts since a company is deemed to be insolvent if, having received a statutory demand, it fails to pay the creditor or have the demand set aside by a court.

Section 459E (1) of the Corporations Act sets out the requirements of the statutory demand and they include the following:

  1. A single debt that the company owes to the person, that is due and payable and whose amount is at least the statutory minimum; or
  2. 2 or more debts that the company owes to the person, that are due and payable and whose amounts total at least the statutory minimum.

The statutory minimum is defined in Section 9 of the Corporations Act as $2,000 or such other amount as is prescribed.

The requirements of the statutory demand are set-out in section 459E (2) of the Corporations Act as follows:

  1. If it relates to a single debt – must specify the debt and its amount; and
  2. If it relates to 2 or more debts.-. must specify the total of the amounts of the debts; and
  3. Must require the company to pay the amount of the debt, or the total amounts of the debts, or to secure or compound for that amount or total to the creditor’s reasonable satisfaction, within 21 days after the demand is served on the company; and
  4. Must be in writing and
  5. Must be in the prescribed form (if any); and
  6. Must be signed by or on behalf of the creditor

Section 459E (3) of the Corporations Act states that unless the debt is a judgment debt the demand must be accompanied by an affidavit verifying that the debt, or the total amounts of the debts, is due and payable by the company.

Once a statutory demand has been served a number of actions will most likely follow:

  1. the company pays in full; or
  2. the company contacts the creditor and they negotiate a settlement; or
  3. the company applies to the courts to have the demand set aside; or
  4. the company does not respond, and the creditor applies to have it wound up.

If a company wishes to have a statutory demand set aside, under section 459G (3) it must apply to the court within 21 days of the notice of the demand and it must serve the application and the supporting affidavit on the person who made the demand within that 21 day period as well.

This short document does not intend to go into any further detail regarding the “ins and outs” of the statutory demand process.

Directors however should be aware that if a statutory demand is received by a company and that company is in financial difficulty leading to a presumption of insolvent trading then the directors should consider the implications of section 588G of the Corporations Act on themselves and if there is any possibility of utilising the safe harbour provisions for the benefit of the company and themselves.

COVID-19 reforms to the Insolvency Laws

On Sunday, 22 March 2020 the Federal Treasurer announced a series of amendments to the Corporations Act in order to provide temporary relief for financially distressed businesses due to the spread of COVID-19 and the various restrictions being placed on the movement of persons in the community.

The Coronavirus Economic Response Package Omnibus Act 2020 (Cth) (hereafter referred to as the CERPO Act) passed both Houses of Parliament on Monday, 23 March 2020 and received Royal Assent on Tuesday, 24 March 2020 and will operate for a six month period starting on Wednesday, 25 March 2020 being the day after Royal Assent was granted.

The changes made, contained in schedule 12 to the CERPO Act, are intended to avoid unnecessary insolvencies and bankruptcies by providing a safety net for:

  1. directors and businesses to help them operate during a temporary period of illiquidity rather than enter into voluntary administration or liquidation; and
  2. Individuals to assist them with managing debt and avoiding bankruptcy.

Insofar as matters to do with statutory demands are concerned the elements of the package are as follows:

  • A temporary increase in the threshold at which creditors can issue a statutory demand on a company and the time companies have to respond to statutory demands they receive.
  • Here the government is temporarily increasing the current minimum threshold for creditors issuing a statutory demand on a company from $2,000 to at least $20,000. These changes will apply for six months.
  • Not responding to a demand within the specified time creates a presumption of insolvency for the company. Here the government is increasing the timeframe for a company to respond to a statutory demand from 21 days to six months. These changes will apply for six months.

Changes have also been made with regard to the current laws applying to bankruptcy where at present a creditor can initiate bankruptcy proceedings against an individual debtor if they owe a debt of $5,000 and as with a creditor’s statutory demands, an individual debtor will be deemed to be insolvent if they fail to respond to a bankruptcy notice within 21 days of service.

In conclusion

The temporary changes to the bankruptcy laws raise the limit on the debt from $5,000 to at least $20,000 and lengthen the time to respond to a bankruptcy notice from the date of service of that notice to six months.

In addition, if an individual debtor applies for voluntary bankruptcy, unsecured creditors cannot take further action against them for 6 months rather than 21 days.

As with the changes applying to statutory demands these changes will apply for six months.

It is possible that if the COVID 19 pandemic continues for some time yet then the amendments mentioned above may be extended.

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How the Coronavirus Economic Response Package changes the laws on insolvency