The impact of the covid-19 pandemic has forced the government to make a huge number of changes to Australia’s insolvency framework. The Treasury is now deliberating about whether or not the current monetary threshold at which a statutory demand can be issued by a creditor should remain at $2,000 or should be permanently raised to a higher amount.
A statutory demand is a formal demand for the payment of a debt owed by a company, issued under the Corporations Act 2001. Written submissions are sought from stakeholders on whether the threshold should remain at $2,000, or whether it should be increased to some other amount going forward.
The minimum threshold at which creditors are allowed to issue a statutory demand on a company could potentially rise by five times from its current amount as the Treasury ponders about aligning it with the personal bankruptcy threshold. The personal bankruptcy threshold, was doubled from $5,000 at the start of 2021.
The Treasury believes that it is important for there to be harmony between the two thresholds as this “can provide desirable consistency between the two different regimes, supporting individuals who run small businesses that need to engage with both regimes where their business is in financial distress”.
Despite this belief The Treasury also contends that “there may also be reasons for the difference in thresholds. If an individual is made bankrupt, the personal implications may be more significant than in the corporate context. If a statutory demand forces a company into liquidation, the directors of the company may benefit from limited liability, protecting their personal assets”.
“However, in practice, a significant number of small-business owners have given personal guarantees secured by personal assets (such as their primary residence) in order to obtain financing for their company’s liabilities” said the Treasury in its consultation paper.
Craig Dangar from C&D Restructure and Taxation Advisory says that “there is a definite need for the statutory demand threshold to be raised as the current $2,000 is simply too low, the costs of undertaking an action too high and it is an incentive for the system to be misused if there is a delinquency, alternatively if there was a low cost option then the threshold would be appropriate” says Mr. Dangar.
The $2,000 statutory demand threshold was introduced in 1992 and has not kept up with inflation. The threshold has been raised once in the last three decades. This was in response to the economic impact of the covid-19 pandemic last year when the threshold was increased to $20,000 up until 31 December 2020.
The Treasury furthermore believes that the $2,000 threshold does not make sense commercially due to the costs of drafting and issuing the statutory demand and then having to deal with costs of challenging the statutory demand in court if it is disputed by the recipient company.
On the other hand, it contends that reducing the ability of creditors to act may lead to inadvertent consequences, this includes creditors managing their risk of non-payment by dealing with the company on less generous terms, such as higher interest rates on loans, a shorter payment period or by needing cash upon delivery. The Treasury’s consultation will conclude on Friday 5th March 2021.
“There is a balance between the costs of taking action and the underlying thresholds, we would argue that when the laws were initially enacted that the costs were much lower, we are now facing a significantly greater costs with limited benefits to creditors, we would argue it needs to be raised” says Craig Dangar.
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