On 24 September 2020, the Australian Government announced changes to the national insolvency framework to better address the needs of Australian small businesses, their employees, and their creditors. The key goals of these changes were to address the lack of flexibility for small business, and reduce the high cost, time barriers, and complex processes. These deficiencies with the old framework limited small businesses’ ability to engage with the insolvency system early and save business.
These reforms came into effect on 1 January 2021, and included changes such as:
1. The creation of a formal debt restructuring process for eligible small companies;
2. Temporary relief for eligible companies seeking to enter the formal debt restructuring process;
3. A simplified liquidation process for a creditors’ voluntary winding up of an insolvent company; and
4. A permanent increase to the threshold amount at which a creditor can issue a bankruptcy notice to $10,000 from the pre-COVID-19 threshold of from $5.000.
Further to these reforms, the Government recently consulted industry participants on whether the threshold for issuing a statutory demand should receive a permanent increase.
What Is a Statutory Demand?
A statutory demand is a demand under section 459E of the Corporations Act 2001 (Cth) (Act) issued upon a company by a creditor for outstanding debts, payable within 21 days of service. The Act currently requires that statutory demands relate to either a single debt of at least $2000, or 2 or more debts totalling at least $2,000.
Most commonly, statutory demands are issued for the purpose of pressuring a company to pay their debts or proving that a company is insolvent if they fail to comply with the demand.
If a company fails to comply with a statutory demand, they will be presumed to be insolvent. Therefore, any issues with the statutory demand should be raised within 21 days of being served. If no action is taken within this time, the company will have little recourse to resist being compulsorily wound up.
Should the Threshold Be Increased and by How Much?
There are a range of arguments both for and against increasing the statutory demand threshold, and even more debate about how much it should be increased by.
A key argument against any increase is that, to be solvent, a company must be able to pay all its debts as and when they are due. Accordingly, there is no reason to increase the threshold, because if a company is not able to pay a debt of $2,000 then it just as insolvent as a company who cannot pay a debt of $5,000 or $10,000.
Increase to $5,000
An increase in the threshold would acknowledge that the $2,000 threshold was set many years ago and needs to be increased to allow for inflation. A threshold amount of $5,000 would allow for these considerations, whilst avoiding setting the threshold too high so as to prevent businesses for recovering legitimate debts from corporate debtors. A threshold of $5,000 would also be consistent with the typical legal fees associated with issuing a statutory demand, whereas many debts in the $2,000 to $5,000 range might be uncommercial to pursue in this way.
Increase to $10,000
Given the amount time that has passed since the $2,000 threshold was introduced and the rate of inflation, some might argue the $5,000 is not a sufficient threshold to reflect the current Australian economy.
It is also arguably desirable to have symmetry in threshold amounts between the bankruptcy regime and the corporate insolvency framework to increase simplicity. This is debated however, as some people consider the process and outcomes of personal bankruptcy to be significantly more serious than corporate insolvency, as should thus have a higher threshold.
Different Threshold for Different Debts
Another viable option would be to increase the general threshold to some amount, while introducing a second, lower threshold to enforce judgment debts (debts arising out of a Court or Tribunal judgment). This would assist in avoiding the perception that companies can ignore judgment debts if they were below the statutory threshold due to lack of fear of litigation or enforcement.
Summary of the Key Impacts of an Increase in the Threshold
An increase in the threshold will reduce the number of creditors who will be able to use a statutory demand to obtain payment of their debts. The higher the threshold, the more creditors will be prevented from using statutory demands to recover their debts.
Increasing the threshold would prevent creditors from issuing statutory demands from many debts that would fall within the various small claims jurisdictions (typically less than $25,000). This would mean many claimants with small disputed claims would be less likely to seek to pursue small claims in the Courts or Tribunals. This is because even if they obtain a judgment they would not be able to enforce it by way of a statutory demand, and other avenues available to enforce judgments are typically more expensive.
An increase in the threshold may also encourage rogue debtors to incur debts from multiple suppliers totalling just under the increased threshold, and then avoid payment. This will be more prevalent the higher the threshold, and more serious given that creditors, especially small businesses.
While consultation on the threshold increase may have already closed, be sure to check back in to see what the outcome of the proposed reforms are.
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