The Federal Government is considering whether to increase the threshold amount for issuing a statutory demand to $10,000.
Statutory demands can currently be issued by creditors who are owed a debt of at least $2,000 by a company. If a company fails to pay a creditor who has served it with a statutory demand or have the demand set aside by a Court within 21 days of service the company is deemed to be insolvent. A company which is deemed to be insolvent by virtue of its failure to comply with a statutory demand may be wound up by the Court and a Liquidator appointed to the company.
The threshold was previously raised in response to the economic impact of COVID-19 last year when it was increased to $20,000 up until 31 December 2020. However, from 1 January 2021 the threshold has gone back to being $2,000.
The Federal Government considers there is merit in permanently raising the threshold to $10,000 so that it is the same as bankruptcy threshold. The bankruptcy threshold has recently been increased from $5,000 to $10,000.
It is also believed that a $2,000 threshold does not make sense commercially because of the costs of issuing a statutory demand. There is also a significant cost of disputing a statutory demand and the only way to do this, if the creditor who issued the demand will not withdraw it, is to make an application to Court. A Court can set aside a statutory demand if there is a genuine dispute in respect of the debt which is the subject of the demand or an offsetting claim which if taken into account would reduce the debt to below $2,000.
In the alternative, however, reducing the ability of creditors to take action may lead to unintended consequences, including companies refusing to pay debts of less than $10,000 or trying to negotiate settlements or discounts of these types of debts with the knowledge that the creditor who is owed the debt cannot easily do anything about it.
Advice Regarding Options Available
A company in financial difficulty which receives a statutory demand should obtain advice regarding the options available to it.
At Pearce & Heers, we can provide assistance to the directors of a company which has received a statutory demand including advising and assisting with negotiating a payment arrangement. We can also provide assistance with negotiating a settlement with the creditor who issued the demand, or in respect of acting as Administrators or Liquidators of the company.