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Almost Time to Demand

The Coronavirus Economic Response Package Omnibus Act 2020 (the Omnibus Act) 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:

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

Each temporary measure ends 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).

Post-25 September 2020 we will almost certainly see an increase in the issuance of statutory demands as creditors seek to recover debts that have remain unpaid and continue 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 would suggest that the temporary measures have decreased the number of formal insolvencies since March however this will likely correct rapidly in the final quarter of the year. 

Examples of impact of the temporary regime

  • If a creditor serves a statutory demand on a debtor company during the six-month period, 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  • If a creditor serves a statutory demand on a debtor company immediately after the temporary measures are repealed (currently 25 September 2020, unless extended), the period for the debtor company to respond to avoid a presumption of insolvency will revert to the previous 21 day period. 
  • Where a statutory demand is dated and posted to a debtor company prior to the commencement of the Omnibus Act, the temporary measures will apply to that statutory demand where it is in fact served on that debtor company during the six-month period. This position was made abundantly clear in the recent decision in Sunstate Land Pty Ltd v Hiview Design & Construction Pty Ltd [2020] QSC 181.

Implications for debtors

Directors of a debtor company will need to be wary of the impending end to the temporary statutory demand regime and to plan accordingly.  With the pandemic and social distancing measures continuing to increase financial pressure, directors need to turn their minds to company debts which may be the subject of a statutory demand and the availability of any basis for the statutory demand to be set aside. 

This might include consideration as to whether or not:

  • the debtor company has a genuine dispute about the debt;
  • the debtor 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) or if there is otherwise a fatal defect in the demand which would cause substantial injustice to the recipient; or
  • if the likely level of debts are insurmountable, whether the board should consider voluntary administration. 

Considerations for creditors

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 as against a creditor who subsequently serves on the debtor company after the temporary measures ends on 25 September 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 $20,000.00, which will revert to $2,000.00 in September.

Statutory demands are highly prescriptive and a failure to comply with the prescribed statutory form when drafting and serving the demand may invalidate it (form 509H of the Act). 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 for the good of the commercial community[1].  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.

However, statutory demands and subsequent applications to wind up the company should not be used vexatiously.  Doing so may incur a costs order against the creditor and the Court will consider proceedings an abuse of process[2].  This is also the case where the creditor is aware of the solvency of the company, for instance, a large listed company owing a nominal amount to a creditor.   In such a circumstance, the proper course of commencing proceedings in Court should be followed.

Further, the Court has previously ruled on what it considers to be a debt.  Claims for unliquidated damages are not debts unless a judgment or settlement amount has been ordered[3], 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[4].    For instance, claims for indemnity from insurance companies are not considered debts until a settlement has been agreed or a Court ordered amount has been demanded. 

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[5].  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 fatal 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 dispute which is plausible and requires further investigation[6].    The dispute must also be bona fide, and the grounds for disputing must be real and not spurious or hypothetical[7].  For example, arguing potential future cashflow of the company would deem the company solvent is likely to be considered a spurious defence.

The law around statutory demands is very technical and we would recommend reaching out for expert advice should you have a query either as a creditor or indeed as a debtor. The Hamilton Locke finance, restructuring and insolvency team have a broad range of top-tier experience acting for a variety of stakeholders in distressed scenarios.  For more information please contact Nick Edwards, Zina Edwards, or Brit Ibanez.

 

Sources for this article include:

[1] Scolaro's Concrete Construction Pty Ltd v Schiavello Commercial Interiors (Vic) Pty Ltd (1996) FCR 319.
[2] Chadwick Industries (South Coast) Pty Ltd v Condensing Vaporisers Pty Ltd (1994) 13 ACSR 37.
[3] Odyssey Re (Bermuda) Limited (Company No. 161930) v Reinsurance Australia Corporation Limited [2001] NSWSC 266.
[4] Box Valley Pty Limited v Elizabeth Kidd and David John Kidd (2006) 24 ACLC 471.
[5] Condor Asset Management Ltd v Excelsior Eastern Ltd [2005] NSWSC 1139.
[6] Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 referred to in Createc Pty Ltd v Design Signs Pty Ltd [2009] WASCA 85.
[7] Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd (1997) 76 FCR 452, referred to in Giacci Holdings Pty Ltd v Giacci [2007] WASC 187.