We are currently living in extraordinary times and require extraordinary measures to help combat the effects of the COVID-19 pandemic. This on-going pandemic is causing unimaginable havoc on not only our health system, but also the economy at large which severely affects individuals and businesses. In light of this, the Australian Government had urgently introduced a variety of measures to deliver flexibility in the Corporations Act 2001 (Cth) and short-term support for individuals and businesses suffering from financial trouble.
These temporary reforms are contained in the Coronavirus Economic Response Package Omnibus Act 2020 and will be in place until 25 September 2020 or any later date as the pandemic continues to affect the livelihoods of Australians.
Creditor issued Statutory Demands
Under normal circumstances, a creditor can issue a statutory demand pursuant to the Corporations Act 2001 (Cth) against a company to demand payment of a debt of at least $2,000 that is due and payable.
The company then has 21 days after being served with said statutory demand to either:
- Pay the amount that is being demanded; or
- Reach an agreement with the creditor about the debt to the creditor’s satisfaction; or
- Apply to have the statutory demand set aside in Court.
Should a company fail to respond to the statutory demand within the stipulated 21 days, it will then be assumed to be insolvent and the creditor can then apply to Court to seek that the company be wound up in insolvency and a liquidator appointed to the company.
In order to reduce the instances of companies being liquidated, the Coronavirus Economic Response Package Omnibus Act 2020 makes the following changes to the statutory demand process:
- Increase the statutory minimum from $2,000 to $20,000; and
- Extend the time for a company to respond to a statutory demand from 21 days to 6 months.
However, the changes to the statutory demand system do not affect the ability of the creditor to pursue a company through the Courts to obtain a Court Order for the amount owing.
Liability for Trading While Insolvent
Usually, a company’s director must prevent the company trading while it is insolvent. Pursuant to the Corporations Act 2001 (Cth), a director may be personally liable for debts incurred by the company if it trades while insolvent.
The usual practice is for directors to place the company into external administration as soon as they suspect insolvency, in order to reduce their potential personal liability under normal conditions.
The measures introduced by the Coronavirus Economic Response Package Omnibus Act 2020 provide a special safe harbour provision to relieve company directors from their duty to prevent insolvent trading for debts incurred in the ordinary course of the company’s business.
This was done by the Australia Government in the hopes that it will give businesses the confidence to continue to trade, with the aim of returning to viability once the COVID-19 pandemic has ceased.
It is vital to take note that the above mentioned measures do not affect the liability of a company to repay debts that it incurs.
The Australian Government has also introduced measures to provide relief for individuals facing bankruptcy action. Under normal circumstances, when a debt is owed by an individual, a creditor can issue a bankruptcy notice to a debtor pursuant to the Bankruptcy Act 1966 (Cth), if the creditor has obtained a final judgment or final order against the debtor for an amount of at least $5,000.
Once a bankruptcy notice is issue to the debtor, the debtor then has 21 days after being served with the notice to respond to it, in the same way as a company served with a statutory demand.
Under the Coronavirus Economic Response Package Omnibus Act 2020, a creditor must now have a final judgment or order against the debtor for a minimum amount of $20,000 instead of only $5,000, before it can request for a bankruptcy notice to be issued. Furthermore, the time for a debtor to respond to a bankruptcy notice has now been extended to 6 months instead of the usual 21 days. It is again important to note that a creditor is still able to enforce a debt owing to it by an individual through the Courts in spite of the above mentioned measures.
AH2 Legal is here to help
It is important to note that the response by the Australian Government in relation to the COVID-19 pandemic changes almost on a daily basis. It is vital that you keep up to date with all relevant information on a regular basis as well as be prepared to respond accordingly as the landscape in which this pandemic changes.
If you have any queries about how your businesses or you yourself as an individual may be impacted by the current crisis, please feel free to contact one of our friendly lawyers via email at email@example.com to seek an obligation free consultation.
We at AH2 Legal remain steadfast in helping you and will remain your trusted legal advisors during this period of uncertainty. Ahead, Together.