Timing is Everything: An Important Consideration re Statutory Demands and the Covid-19 Economic Response Package

The following article was published by Lexology on 25 August 2020:

The service of a statutory demand under section 459E of the Corporations Act 2001 (Cth) (Act) has long been a method available to a frustrated creditor in seeking payment of a debt which is more than the statutory minimum and which is owed by a corporation.

This article looks at an important consideration with respect to the timing of service of a statutory demand, arising from the looming end to one of the measures introduced in response to the COVID-19 pandemic.

The regime before COVID-19

Prior to the onset of COVID-19, from a creditor’s perspective, the appeal of serving a statutory demand lay largely in:

• the relatively low statutory minimum (i.e., $2,000) for a debt which could be the subject of a statutory demand; and
  
  
• the short timeframe (i.e., 21 days) allowed for the debtor company either to comply with the statutory demand or apply to the Court for an order setting aside the statutory demand (and if the debtor did neither of those things within the 21-day period, the creditor could bring an application that the debtor company be wound up in insolvency on the basis of failure to comply with the statutory demand).

Because the consequences of failure to comply with a statutory demand which remains in effect at the end of the relevant period are so severe (i.e., deemed insolvency), the threshold for having a statutory demand set aside by the Court is quite low.  Under section 459H of the Act:

• if the debtor shows that:
  
  
  • there is a “genuine dispute” about the existence or amount of a debt to which the demand relates; or
    
    
  • the debtor company has an offsetting claim against the creditor;

and

• the “substantiated amount” of the debt is less than the statutory minimum,

then the Court must set aside the statutory demand.

Notwithstanding that low threshold for having a statutory demand set aside, a creditor knew that if it served a statutory demand, matters would be “brought to a head” quickly (although it should be noted that there is case authority to the effect that a statutory demand should not be used merely as a “debt collection device” where the creditor knows there is a genuine dispute - see, e.g., Poonon Pty Ltd v Deputy Commissioner of Taxation [1999] NSWSC 1121, at [21]).

Changes due to COVID-19

As part of the range of measures designed to see the Australian economy through the pandemic, in March 2020, the Commonwealth Government enacted changes to the legislative regime which applies to statutory demands.

Specifically, under the Coronavirus Economic Response Package Omnibus Act 2020 (Cth) (CERPO Act), for a 6-month period which commenced on 26 March 2020:

• the minimum amount for a statutory demand is increased from $2,000 to $20,000; and
  
  
• the period within which the debtor company must comply with a statutory demand (or apply to the Court for an order setting aside the statutory demand) is increased from 21 days to 6 months,

(together, the Temporary Measures).

So, what’s the issue?

At the time of writing, it is possible that the Temporary Measures will be extended beyond the initial 6-month period.  Indeed, the CERPO Act contains a “sunsetting provision” which contemplates expressly that a legislative provision which ceases to operate on or before 15 October 2020 may be extended for 6 months.

That said, it can safely be assumed that the Temporary Measures will end at some point, and the pre COVID-19 regime will apply to statutory demands once again.

The likely result is that a debtor company which is served with a statutory demand within a short period before the end of the Temporary Measures will have 6 months within which to comply (or apply to the Court for an order setting aside the statutory demand), even though a debtor company which is served with a statutory demand within a short period after the end of the Temporary Measures will have only 21 days for that purpose.  In other words, a statutory demand served shortly after the end of the Temporary Measures will expire long before many of those served while the Temporary Measures are in place.

By way of example (and assuming the Temporary Measures are not extended beyond 25 September 2020):

• where a creditor serves a statutory demand on 21 September 2020, the debtor company will have until 21 March 2021 either to comply with the statutory demand or apply to the Court for an order setting aside the statutory demand;
  
  
• yet, where a creditor serves a statutory demand on 30 September 2020 (i.e., 9 days later), the debtor company will have only until 21 October 2020 to take one of those steps; and
  
  
• it follows that delaying for 9 days before serving the statutory demand might save the creditor 5 months of waiting time.

In the above circumstances (and assuming the Temporary Measures are not extended beyond the initial 6-month period), a creditor who wishes to serve a statutory demand may be well-advised to wait until after 25 September 2020 before doing so.

Is there an alternative?

Whether or not the Temporary Measures are extended, it is possible that the Commonwealth Government will introduce some sort of transitional regime following their expiry, in order to ameloriate the effects identified above.  For example, once the Temporary Measures come to an end, there could be a period in which a debtor company served with a statutory demand has a timeframe less than 6 months but more than 21 days (say, 3 months) in which to comply with the statutory demand or apply to the Court for an order setting aside the statutory demand. 

That said, it is difficult to see how any transitional regime would eliminate the possibility that a statutory demand served shortly after the regime ends will expire before some statutory demands served earlier. 

As such, a creditor contemplating serving a statutory demand should consider carefully the optimum date for that demand to be served.