Insolvency update: Statutory demands — Federal Government grants another extension

On 7 September 2020, the Federal Treasurer Josh Frydenberg announced that the temporary changes to insolvency laws which came into effect on 25 March 2020 will be extended to 31 December 2020.

What are temporary changes?

The changes outlined in s.5.4.01AA of the Corporations Regulations 2001 (Cth) temporarily increased:

• the minimum amount of a creditor’s statutory demand (CSD) from $2,000 to $20,000; and
• the time for a debtor company to comply with a CSD from 21 days to 6 months.

As previously highlighted in our Insolvency update published 26 March, these temporary measures were set to be repealed 6 months after they came into effect, i.e. on 25 September 2020.

Effect on Australian businesses

The temporary relief measures to financially distressed businesses and the extension of those measures has had, and will likely continue to have, a number of effects on Australian businesses, including:

1. reducing the likelihood that businesses which are suffering from a temporary liquidity problem due to the impacts of COVID-19 are forced into liquidation;
2. fewer companies will be wound up based on a failure to comply with or set aside a CSD that has been served on them;
3. reducing the amount of CSDs being served by creditors; and
4. deterring people from using the statutory demand process as a debt collection tool. This may lead to more litigation since a creditor might obtain a judgment against the debtor company quicker than having to wait for the temporary measures to be lifted, particularly given the chance that they will be extended again.

Important information about CSDs

Pursuant to s. 459E of the Corporations Act 2001 (Cth), a creditor can serve a statutory demand — commonly referred to as a CSD — requiring a company to pay a debt within 21 days of service where there is a debt or debts that are due and payable and total at least $2,000. This limit has been temporarily increased to $20,000.

The CSD must be signed by or on behalf of the creditor and be in accordance with the prescribed form, which is Form 509H. If the creditor is relying on a debt that is not a judgment debt, then the CSD must be accompanied by an affidavit that verifies the debt is due and payable to the creditor.

If a company is served with a CSD, the company can apply to set it aside within the deemed statutory period (21 days, now temporarily extended to 6 months) which has the effect of extending the time for compliance under s. 459F(2).

Expiring CSDs

Despite the temporary relief measures implemented to keep businesses out of liquidation, CSDs which were served on or after 25 March 2020 may be expiring shortly and companies that were served with a CSD must still either:

• satisfy the debt;
• reach an agreement with the creditor pursuant to which the CSD is withdrawn; or
• apply to set aside the CSD.

In order to apply to set aside a CSD, the application needs to be filed and served before the statutory period expires.

The timeframe is strict and failure to address a CSD appropriately will result in a company having committed an act of insolvency. This can lead to an application to wind-up the company.

An application to set aside a CSD can be founded upon one or more of the following grounds:

• the company has a genuine dispute about the debt;
• the company has an offsetting claim; or
• ‘some other reason’.

The first two reasons are self-explanatory and do not require the ordinary standard of proof in commercial matters (i.e. on the balance of probabilities). It is openly acknowledged to be a low threshold.

The words ‘some other reason’ cover many different situations but commonly involve a technical defect in the CSD or accompanying affidavit, or an abuse of process.

Responding appropriately to a CSD is a serious matter and should be undertaken with due attention and expertise.

KCL Law has years of experience in corporate and personal insolvency, and is able to advise on and assist with CSDs.

More information

For more information, or to discuss how this might impact you, please contact:

Author

This Insolvency update was co-authored by Arnie Vijayakumar, Senior Associate, and David Weinberger, Principal Lawyer.

Note: This update is a guide only and is not intended to constitute legal advice.