By Kim Nguyen, Solicitor of Matthews Folbigg Lawyers, in our Insolvency, Restructuring and Debt Recovery Group.
On 15 February 2021, the Treasury released a consultation paper “Increasing the Statutory Demand Threshold” seeking submissions on the appropriateness and impacts of permanently increasing the statutory demand threshold. The consultation period expired on 5 March 2021, however, further information can be found here.
What were the temporary changes?
In response to COVID-19, Federal Parliament introduced insolvency reforms to support small businesses in financial distress. In March 2020, the Government passed the Coronavirus Economic Response Package Omnibus Act 2020 (Cth) (Coronavirus Act) which temporarily:
- Increased the statutory minimum debt(s) based on which a creditor can issue a statutory demand from $2,000 to $20,000;
- Extended the period within which the company may respond from 21 days to six months.
The purpose of the reform was said to be to reduce the pressure upon companies that were struggling to pay their debts.
However this temporary relief ended on 31 December 2020, and the thresholds for creditor’s statutory demands reverted to $2,000 and 21 days. The Government is now considering whether the threshold should remain at $2,000 or whether it should be increased. By way of comparison, the threshold for bankruptcy notices (issued against individual debtors under the Bankruptcy Act 1966 (Cth)) has been permanently increased to $10,000, after the COVID-19 moratorium ceased.
What is a creditor’s statutory demand?
A statutory demand is one of the many ways to recover your debt from a company. In essence, the statutory demand is a formal written request that can be issued on a company pursuant to section 459E of the Corporations Act (Cth) in relation to a debt that is due and payable. Failure to comply with a creditor’s statutory demand will mean a company is presumed to be insolvent pursuant to the Corporations Act 2001 (Cth)
How does a creditor’s statutory demand work in practice?
- A company (the debtor) owes you (the creditor) an amount of at least $2,000.
- You may serve a creditor’s statutory demand on the debtor requiring the payment of the debt.
- The debtor has 21 days to respond to the statutory demand by either:
- Paying, or reaching a compromise with you in respect of the debt; or
- applying to the Supreme Court or Federal Court of Australia to set aside the demand
There are a number of technicalities associated with using creditor’s statutory demands and they are not suitable for all debts. However used correctly and in the right matter they can be a powerful tool to recover debts and improve cash flow.
If the threshold is increased, this usefulness is likely to be diminished and creditors will be forced to use more difficult and potentially costly means of debt recovery for debt below the threshold.
If you have been served with a demand or need assistance with serving one, please contact a Principal of Matthews Folbigg Insolvency, Restructuring & Debt Recovery Team for further information or advice:
Jeffrey Brown on (02) 9806 7446 or firstname.lastname@example.org
Stephen Mullette on (02) 9806 7459 or email@example.com