If a person is owed money by a company, then typically they have 4 options, 3 of which involve processes to seek to recover that debt if payment is overdue and not forthcoming:
- Report the non-payment to a credit reporting agency;
- Engage a debt collector (who ultimately may do 3 or 4 below);
- Commence court proceedings; or
- Issue a statutory demand.
A statutory demand is a formal notice in a specified format giving a person 21 days to pay the debt, otherwise the person is deemed to be insolvent, unless they seek to set it aside or come to some arrangement with the creditor. If the statutory demand is not complied with or set aside, then the creditor can seek the winding-up of the company (although this takes further effort and expense, and ultimately may not recover the debt). It is a powerful tool, as even a deemed insolvency may trigger a default under the debtor’s finance facilities. The statutory demand is not available if the amount of the debt is disputed.
During Covid, the government recognised that many businesses would struggle financially. Rather than seeing mass insolvencies, the government implemented a range of responses. In addition to Jobkeeper support, various laws were temporarily modified, including:
- Providing that directors can not be personally liable if their companies trade whilst insolvent; and
- For a statutory demand, providing that they can only be given for a debt greater than $20,000 (up from $2,000) and giving the recipient 6 months before there is a deemed insolvency (increased from 21 days)
These relief measures ended on 1 January 2021. But, for a company that is struggling, they can seek to avail themselves of the new temporary restructuring relief. To do this, they must make a public declaration of this by 31 March 2021. If that has been done, then the increased threshold of $20,000 and 6 months still apply for a further 6 months. But if that hasn’t been done by 31 March, then a creditor can issue a statutory demand that must be complied with within 21 days (and also for debts from $2,000 to $20,000+).
So, if you are a creditor, and the debtor hasn’t made the declaration, then the statutory demand regime fully reverts to pre-Covid rules on 1 April 2021.