DEBT RECOVERY UPDATE 2021
As you may know, due to the significant impact of COVID on the business community, temporary laws were introduced in March 2020 to attempt to help businesses and individuals stay afloat during that very difficult period.
In summary, at a high level, the following changes were made:
1. A creditor could not issue a statutory demand to a debtor company if the company did not owe the creditor at least $20,000.00 (which was increased from the usual $2,000.00 minimum);
2. A creditor could not issue a bankruptcy notice to an individual debtor unless the judgement amount owing to the creditor was $20,000.00 (increased from $5,000.00); and
3. The period for which the corporate debtor or individual debtor had to respond to the statutory demand or bankruptcy notice was increased from 21 days to 6 months.
The above changes were in place until 31 December 2020, and obviously caused delays for creditors in seeking to recover their outstanding debts.
As of 1 January 2021, the minimum amount to pursue a statutory demand has returned to $2,000.00, and the period to comply with the statutory demand has returned from 6 months to 21 days.
Interestingly, the minimum amount required to pursue a bankruptcy notice has now increased to $10,000.00, being an increase of $5,000.00 from the pre-Covid minimum of $5,000.00. The period to comply with the bankruptcy notice has now reduced from 6 months to 21 days.
Therefore, based on the above, apart from the increase in the minimum judgement amount required to be able to issue a bankruptcy notice, the relevant conditions have now otherwise returned to pre-Covid levels.
Insolvent Trading Moratorium
Further to the above, as well as the increased protections for individuals and companies, when defending statutory demands or bankruptcy notices, there was an amendment to the Corporations Act which provided a “safe harbour” defence for directors from civil insolvent trading liability which can arise, and can potentially make directors personally liable for debts incurred when they knew, or should have known, that their company was insolvent.
This moratorium applied to debts incurred during a period of at least 6 months, between 25 March 2020 and 31 December 2020, in the “ordinary course of the company’s business.” This is an important consideration for directors and business owners to take into account because any extraordinary expenses incurred, or any expenses that are incurred that are not necessary to ensure the survival of business during the “safe harbour” period in 2020, will not be taken into account in this regard.
What does this mean for you?
Moving forward, it is likely that most creditors, including the ATO, will recommence their pre Covid recovery techniques. For example, creditors may now be more inclined to issue statutory demands and bankruptcy notices for any outstanding debts that are now due and payable given that the friendlier Covid business protection measures, set out above, have been rolled back.
Therefore, it is crucial that all companies and individuals have a plan to deal with any outstanding debts, including debts incurred during the Covid “safe harbour” period in 2020, to ensure the financial viability of those individuals and businesses. Should any parties have any concerns or require assistance in either pursuing unpaid debts or defending claims from creditors, we recommend that urgent legal advice is sought to ensure the parties rights are appropriately protected.
Should you require any assistance or advise in respect to the above, our experienced litigation team can assist you with this.
Director | Litigation