Debt, Deferments, and the Devil in Statutory Demands
There is no doubt by now you have explored every option for your business to ensure that you are making it through the difficulties of the COVID-19 pandemic (“COVID”). You may be negotiating with your landlord or tenant about rent relief or deferring payments to creditors, but have you considered what will happen when the pandemic comes to an end? What will happen to the deferred payments? This series of articles aims to prepare you for surviving the aftermath of COVID. In this instalment, statutory demands and how they might hit your business harder than COVID.
Statutory demands are notices to pay your debt to a creditor within a certain period. Failure to pay in accordance with the statutory demand or have it set aside or withdrawn is an act of insolvency and the creditor can rely on your non-compliance with the statutory demand to begin the process of winding up your company. Suffice to say, statutory demands are to be taken very seriously. Unfortunately, due to the ease of issuing a statutory demand, many creditors will use them as a debt collection tool, even though they are not intended to be.
Prior to COVID statutory demands held the following characteristics:
- The minimum debt must be $2,000; and
- The time to answer a statutory demand is 21 days from the date of service.
In response to COVID-19, the Coronvirus Economic Response Package Omnibuss Bill ACT 2020 (the “Act”) which has been effective since 25 March 2020, altered statutory demands to the following characteristics:
- The minimum debt must be $20,000; and
- The time to answer a statutory demand is 6 months from the date of service.
*An interesting note is that the Act also provides safe harbour for directors where a company is trading insolvently. Please contact us if you wish to discuss this in more detail as it is outside the scope of this article.
The Act looks to provide stability to companies affected by COVID by alleviating the financial stresses of facing a statutory demand. Great, you may rejoice, I can delay a lot of my debt for the foreseeable future. But what happens when COVID is over and the temporary relief you have been enjoying is pulled out from under you? In particular, what happens when suddenly pre-COVID statutory demands are applicable again?
There is no doubt many creditors have loaded their bullets and are waiting for statutory demands to revert to their former misused debt collecting glory before they pull the trigger. Once this happens, you could be faced with multiple statutory demands for debts that have built up over the course of COVID and facing these all simultaneously could be fatal to your company.
Most businesses will have multiple creditors at any given time, at this stage of reading this article you may already be counting the different creditors and amounts owed in your particular circumstances. Good! It is important to start considering and dealing with your creditors right now. You may not be in a position to satisfy all your creditors but you may be able to stave off/stagger any issues you may encounter post COVID.
Some ways you can be proactive are as follows:
- Assess your cashflow and project to post COVID: Are there any creditors you can satisfy? We anticipate you have already discussed matters with your finance team, but if you haven’t, you should.
- Talk to your creditors. It is highly likely that your creditors are in the same position as you are. Discussing any debt now may provide a solution that could work for all parties.
- Carefully, and with the assistance of legal representation, negotiate payment arrangements. It is important that this is done with legal representation to ensure negotiations of payment arrangements or other action do not prejudice your business in any way.
- Get some legal and financial advice about the structuring of your business. You may find multiple benefits to restructuring your business that will assist in dealing with creditors.
Whatever course of action you choose, it is wise to be considering it now. The costs of dealing with a statutory demand when it is served far outweighs the costs of avoiding having to dealing with it altogether. If you are concerned about what the post-COVID climate looks like for you, please seek advice as soon as you can.
Remember, we are all in COVID together (as far as social distancing allows) so make sure to reach out if you need to.
This article written by:
Date: 10 May 2020