Insolvency trading relief extended to 31 December

Insolvency trading relief extended to 31 December – is there hope for creditors?

By Liam White*

Strategic methods for recovering overdue debts in the current climate

The further extension of insolvent trading and insolvency relief laws to 31 December, 2020 has for some simply kicked the problem down the road and delayed the inevitable.

On the other side, the rules are hindering businesses from being able to recover their bad debts. As the first extension was scheduled to come to an end on September 25, 2020, a large number of businesses were ready to take the necessary action to recoup unpaid debts, only to now need to go back to the drawing board to explore their options.

The original temporary insolvency safe harbour rules increased the threshold for issuing Statutory Demands and Bankruptcy Notices to a minimum debt amount of $20,000, up from $2,000 and $5,000, respectively. The rules have also extended the length of time for debtors to respond to any Statutory Demand or Bankruptcy Notice to six months. In addition to this, the new safe harbour rules continue to temporarily protect directors from any personal liability for insolvent trading during this period.

“The extension of these measures will lessen the threat of actions that could unnecessarily push businesses into insolvency and external administration at a time when they continue to be impacted by health restrictions,” Treasurer Josh Frydenberg said in a press statement. The goal of the extension is “to help prevent a further wave of business failures before they have the opportunity to recover,” not to entirely save businesses from eventual financial collapse.

Some healthy businesses – those who were able to continue to operate and earn despite the lockdown restrictions – currently face difficulties in recovering delinquent accounts, some of which were incurred long before the COVID-19 pandemic began.

The question on the minds of these businesses is this: Are we left with no recourse but to wait until the moratoriums are lifted?

Below we try to answer this question as there is light at the end of the tunnel and there are a number of ways in which we have been able to achieve a satisfactory outcome for both the creditor, and the debtor.

3 proven strategies available for Creditors to recoup debts at this time

Note: It must be emphasised that these options are only ever considered where we have exhausted all other avenues of either a repayment plan, a settlement for a reduced sum, or are simply being ignored after numerous contact attempts have been made.

1. Issue a Statement of Claim

A Statement of Claim is not prohibited by the temporary rules and offers one important benefit to the creditor: it is a document that is filed in court, which brings home the serious nature of the matter and kickstarts the legal process for recovery.

A Statement of Claim sets out the overdue invoices which are unpaid, and outlines the details supporting the facts (e.g. agreement or terms and conditions entered between the two parties). This legal document, once filed, is served to either the individual in person, or to the registered office address for a company.

Similar to a Statutory Demand, on serving a Statement of Claim the debtor is required to respond within 28 days of the service date. This will include settling the outstanding amount, applying to the court for a repayment plan, or filing a defence. All of which move the matter to a resolution without simply letting it go stale and the number of days overdue to continue racking up.

If the debtor still does nothing, you can apply for a Default Judgment. This Judgment once obtained, will place a mark against the credit file of the debtor. You can then use the Judgment order to look at enforcement (i.e. forcing payment) if the debtor is still unresponsive.

2. Enforcement warrant

Pre-COVID-19, a creditor might use a Statutory Demand to demand payment within 21 days of service. With the temporary relief laws, the debtor is given a longer time frame of six months to respond. The law states that the failure of a Director to respond to a Statutory Demand within the 21 day period (now 6 months) thereby commits an act of insolvency, which gives a creditor cause to file a Winding Up Application against a debtor. The threat of having your company wound up and a liquidator appointed is what makes the issuing of a Statutory Demand an effective option.

An enforcement warrant can work in the same way. Bear in mind, you can only issue an Enforcement Warrant where you have already obtained a Judgment. In a nutshell, if the Enforcement Warrant is carried out by the court appointed sheriff, and the payment of the Judgment debt is not made, after the director of the business has been notified and has been given an opportunity to resolve the matter, they are again seen to have committed an act of insolvency.

It is presumed that this act of insolvency can be used (in the same way as an unpaid Statutory Demand) as the basis for a Winding-Up Application against the company debtor.

Section 459C of the corporations act states; (2) The Court must presume that the company is insolvent if, during or after the 3 months ending on the day when the application was made: (b) execution or other process issued on a judgment, decree or order of an Australian court in favour of a creditor of the company was returned wholly or partly unsatisfied.

3. Garnishee order

A Garnishee Order (or attachment order as it is called in Victoria) is another effective enforcement tool used to secure payment where you have an unresponsive debtor. Like an Enforcement Warrant, a Garnishee Order can only be filed where you have obtained a Judgment. Unlike a Statutory Demand, which is simply a legal demand that the debtor to pay the debt within 21 days or face possible Windup Proceedings, a Garnishee Order, is filed with the court.

A Garnishee can either be served to an individual’s employer, a bank or other financial institution, or other entities who may be holding money for the debtor.

When a Garnishee order is issued, the debtor is not notified. Instead, the order will be addressed directly to the Financial Institution or Employer who are legally required to comply with the order.

Where to from here?

The extension of the governmentimposed relief has presented some challenges not only to creditors, but also for us in the debt collection industry. Nevertheless, we live in a constantly evolving world and so, have looked for ways to provide effective solutions for our clients as they continue to reach out to us to ensure their invoices to customers are paid in a timely manner and to keep up their cash flow to ensure the viability of their business into the future.

With the implementation and use of the strategies mentioned above, coupled with a team of highly experienced staff, who first and foremost approach each and every matter as an individual situation, and look for the best solution that applies to that case, in both our dealings with the creditor and the debtor, we have seen outstanding results.

What the future looks like for Businesses

With the uncertainties brought about by COVID-19 and the government’s response to the pandemic to try to soften the financial blow, we encourage businesses (both creditors and debtors) to act now and get on the front foot rather than wait for the moratoriums to be lifted.

Communication is key.

Every situation is unique and will have its own solution. By getting on the front foot and exploring your options and speaking to an expert in this field, you can ensure a healthy cash flow and longevity for years to come.

*Liam White Marketing/Head of Sales Slater Byrne Recoveries E: liam@slaterbyrne.com.au T: 61 2 9191 4518 www.slaterbyrne.com.au