In 2021, businesses must move quickly to recover debts, particularly at this time of year when the sum of debtors may be larger than they can manage for the purposes of their cashflow. Over the next three years, Deloitte is forecasting that 5,300 Australian companies (which otherwise would have collapsed without the stimulus) will enter into external administration. It is therefore important to move quickly to recover outstanding debts and ensure that adequate security is in place for their payment, where appropriate. One weapon that creditors can use in their arsenal to recover outstanding sums and otherwise prove solvency is by issuing a statutory demand. This article explains the nature of a statutory demand and when they can be used.
WHAT IS A STATUTORY DEMAND AND WHAT ARE THEY USED FOR?
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:
(a) receive payment of a debt that is not in dispute; and / or
(b) prove the insolvency of a company.
The process is cheap and affordable and:
(a) is designed to discourage insolvent businesses from continuing trade and acquire further debts which it will be unable to pay;[1] and
(b) provides a method of establishing the insolvency of a debtor company and for the winding up of that company.[2]
It is well-established in Australian case law that statutory demands are not intended to be used for debt collection,[3] 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).[4] If the company does not respond within the prescribed timeframe, it will be presumed to be insolvent,[5] and the creditor may apply to the court to wind up the company.[6]
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.
In a recent report, Deloitte predicted that the Federal Government’s relief regime, including the extensive economic stimulus package, has seen approximately 5,800 businesses avoid external administration. However, Deloitte has also forecasted “a wave” of businesses entering into external administration from August 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. Read more about that here (link to Deloitte report).
To discuss a tailored strategy for recovering your outstanding debts please contact Aaron by emailing him at aaron@pragma.law or by calling one of our 18 lawyers on (08) 6188 3340.
[1] Scolaro’s Concrete Construction Pty Ltd v Schiavello Commercial Interiors (Vic) Pty Ltd (1996) 62 FCR 319 (Sheppard J).
[2] Createc Pty Ltd v Design Signs Pty Ltd (2009) 71 ACSR 602 (Martin CJ). See also Lifese Pty Limited v Lee Crane Hire Pty Limited [2012] FCA 302.
[3] Equipped Constructions Pty Ltd v Form Architects Pty Ltd [2006] NSWSC 500 at [24].
[4] The company must either comply with the demand or apply to the court to set the demand aside under section 459G of the Corporations Act.
[5] Corporations Act s 459C(2)(a).
[6] Corporations Act s 459P.
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