COVID-19 has impacted people and businesses financially across Australia. The present situation has also seen individuals who attempt to rely on the current environment to demand payment using practices that are prohibited. It can be overwhelming, especially when a debt collector contacts you about an outstanding debt.
The most common example of this has been in the commercial leasing sector, where commercial landlords unreasonably refuse rental extensions or refuse to provide any other arrangements placing tenants in a very difficult position. What about previous debts which were owed pre-COVID? With these recent changes, can a debt be recovered during this time? The short answer is: It depends.
Changes in the Debt Recovery Space
The changes in the legislation only impact one piece of the debt collection picture. There is a great deal of debt recovery action that can be taken by creditors during this time. Although some individuals and companies have been financially impacted during this time, with the economic restrictions, many businesses are still in a position to manage their debts. The bigger question for Australian creditors is about what practices are permitted during this time.
Under Schedule 12 of the Coronavirus Economic Response Package Omnibus Act 2020 (Cth), the temporary changes are in effect for 6 months from the 24th of March 2020:
- Statutory Demands can only be served against companies for debts exceeding $20,000. Previously the minimum threshold was $2,000.
- Companies now have 6 months to comply with a Statutory Demand, instead of the previous time limit of 21 days.
- Directors will be temporarily relieved from the risk of personal liability for insolvent trading, where the debts are incurred in the ordinary course of business.
Changes in the Bankruptcy Law were also made in the Act, and these changes are also temporary and in effect for the same period:
- the minimum threshold for initiating bankruptcy proceedings has increased to $20,000 from the original threshold of $5,000.
- The 21-day time limit for responding to a bankruptcy notice has been increased to 6 months.
- If a debtor responds to a bankruptcy position by declaring the intention to present a debtor’s petition, they now have 6 months of protection rather than 21-days.
What do these changes mean for Debtors?
Short answer: Creditors can still collect any monies owed.
For debtors in the corporate setting, the changes only impact the ability of creditors to issue a Statutory Demand under section 459E of the Corporations Act 2001 (Cth). This is a legal notice that is served on a debtor for undisputed debts, which will force the company into insolvency if unpaid in the allotted time frame.
For individual debtors, this process is similarly followed to recover monies owed where there is proof of the debt and the amount is above the threshold. A creditor may apply for a Bankruptcy notice which is a formal demand for payment on a final judgment or order. The final judgment must be for more than $20,000 and no more than six years old.[1]
What now?
Communication is essential between the parties. The Australian Competition & Consumer Commission (ACCC) produced a guideline for creditors detailing acceptable practices to ensure that the two parties are protected. The Debt collection process is not just about keeping your business but also balancing the interests of the creditors in obtaining the amount owed and the interest of debtors who will end up being forced into insolvency or bankruptcy.
The team at Midwinters Lawyers are ready to assist you with all legal matters.
[1] https://www.afsa.gov.au/online-services/creditors-bankruptcy-notices
