New Year Ready or not.. for Insolvency Reform and Debt Recovery?

Due to the unprecedented impacts of COVID-19, 2020 has seen an array of legislative interventions to protect businesses to trade through the crisis. One of the more significant changes was the extension of the time frame for companies to respond to their creditor’s statutory demands.

Statutory Demands Breakdown

In ‘normal’ times a creditor’s statutory demand for payment (statutory demand) was the ultimate step. This means a creditor could take it if a debtor was unable to pay an undisputed debt. Failure to pay the statutory demand within 21 days would enable creditors to apply to court and have the debtor company wound up in insolvency. This 21-day response period was extended to six (6) months for statutory demands issued from late March until September, later extended to apply to statutory demands issued up to 31 December 2020.  From 1 January 2021 this response period will return to 21 days and there appears to be no intention to extend this date again.

What is the practical effect of this? The demand has been the inability of creditors to have insolvent debtors wound up, or even convincingly threaten that course of action. After all, there would be not much benefit to serving a statutory demand on 1 November 2020, which must be answered six months later, when a creditor could instead serve a statutory demand on 4 January 2021, which must be answered on 25 January 2021.

This fact, coupled with temporary safe harbour protection for directors engaged in insolvent trading in the ordinary course of business, may lead to a hard awakening for some businesses in the new year.

We expect to see increased use of statutory demands in the new year, offsetting the reduced use during 2020.

Debt restructuring for small business

While the extended timeframes for response to statutory demands are ending, a new debt restructuring process for small business will commence from 1 January 2021. On 15 December 2020, the Commonwealth Government passed the Corporations Amendment (Corporate Insolvency Reforms) Bill 2020. The bill sets up a regime for directors of a small business to continue to trade a viable though insolvent business by negotiating a debt restructuring plan with creditors with the assistance of a Small Business Restructuring Practitioner.

During the restructuring period for a distressed company, the Courts may adjourn the hearing of applications for winding up. Winding up examples include those commenced for failure by the debtor company to comply with a statutory demand. Notwithstanding this, the new laws leave it open to a Court to wind up the company in any case where the Court is not satisfied that continuation of the company under restructuring is in the interest of the creditors.

Creditors will need to factor this into their debt recovery strategy in the new year. Even if the debtor company fails to comply with the statutory demand withing 21 days, it remains open to the debtor to enter restructuring (if eligible) at any point before an application for winding up is heard by the Court and seek adjournment of the application until the debt restructuring process is carried out.

Key takeaways of Insolvency Reform and Debt Recovery

  • Directors of companies in debt should consider updating their registered office details and being alert demands being received in early January.  Further, they should urgently seek advice about their eligibility for small business restructuring and know their obligations.
  • Accountants acting as registered office should also be alert statutory demands received on behalf of their clients and consider arrangements for reviewing mails if accounting offices are closed in early January.
  • Creditors should know their options and revise debt collection strategies for the new year in view of the changing laws.

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Written By

Daniel Dash
Senior Associate
NB Lawyers – Lawyers for Employers
[email protected] 
+61 (07) 3067 6153

Zahra Rashedi
NB Lawyers – Lawyers for Employers
[email protected]
+61 (07) 3067 6153

Daniel Dash and Zahra Rashedi are part of the commercial law team at NB Lawyers – lawyers for employers working with individuals and business owners on a range of matters including business sales, property disputes, estate disputes, shareholder agreements, intellectual property, litigation and taxation matters.