21 April 2020

Changes to recovering debts from corporations in the wake of COVID-19

New laws increase minimum monetary threshold for serving a statutory demand as explained here.
Australia Coronavirus (COVID-19)
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The Coronavirus Economic Response Package Omnibus Act 2020 (Cth) (the CERPO Act) was passed by the federal parliament and received royal assent on 24 March 2020.

Part 2 of Schedule 12 to the CERPO Act temporarily amends the Corporations Act 2001 (Cth) (the Act) and the Corporations Regulations 2001 (Cth) (the Regulations) in order to provide relief to companies that are experiencing financial distress as a result of COVID-19. This is done by increasing the minimum monetary threshold for serving a 'statutory demand' on a debtor company, and the minimum time given to a debtor company to respond to a statutory demand. The changes will apply to every statutory demand served within a period of 6 months after the date of commencement of Schedule 12, being 24 March 2020.

What is a statutory demand?

It is not intended here to provide a thorough description of the background or legal nature of statutory demands or every requirement that applies to the process of preparing, serving and actioning a statutory demand. In simple terms, A statutory demand is a prescribed form of demand for payment that a creditor can serve on a debtor company pursuant to Part 5-4 of the Act. Prior to the amendments to the Act discussed in this article, a creditor can serve a statutory demand where the debtor company owes one or more undisputed debts to the creditor that total $2,000 or more (the 'statutory minimum' amount). The statutory demand must be in the form and include the information prescribed by the Act, the Regulations and the rules of the relevant court.

If the debtor company does not pay the debt, reach some other arrangement acceptable to the creditor, or apply to the court to have the statutory demand set aside within 21 days after receiving the statutory demand, then the creditor can commence proceedings to have the debtor company wound up.

What changes does the CERPO Act make?

The CERPO Act temporarily increases the 'statutory minimum' amount of the debt or debts required before a creditor can serve a statutory demand from $2,000 to $20,000. The CERPO Act also temporarily extends the time granted to a debtor company to pay the amount of a statutory demand or to apply to have it set aside from 21 days to 6 months. These new thresholds will apply to every statutory demand that is served in the six months from when Schedule 12 commences.

The following provisions of Schedule 12 of the CERPO Act are relevant:

  1. section 21 amends sections 459E, 459F and 459G of the Act so that the references to a period of 21 days are replaced with the 'statutory period'. The 'statutory period' is now defined in section 9 of the Act to be either the period of 21 days or, if there is a period prescribed in the Regulations, then that prescribed period; and
  2. section 26 inserts a new regulation 5.4.01AA into the Regulations, which provides that, for a period of 6 months from when the regulation commences:
  1. the prescribed 'statutory minimum' amount of a debt or debts is increased from $2,000 to $20,000; and
  2. the prescribed 'statutory period' for the purposes of the Act is 6 months.

Matters to consider going forward

A statutory demand can, if prepared and used correctly, be an effective means of recovering a legitimate and undisputed debt. The increased monetary threshold and time to respond to a statutory demand that have been introduced by the CERPO Act will be beneficial for companies that are facing financial difficulties during this difficult time. This will also, however, make it difficult for businesses with legitimate debts to use statutory demands to recover their money. In particular, the requirement to wait for 6 months before being able to take further action on a statutory demand will, at least for the next 6 months whilst Schedule 12 of the CERPO Act is in effect, make the statutory demand a much less practical and efficient tool for creditors.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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