Many legal and insolvency practitioners will be familiar with the recent temporary amendments to insolvency and corporations laws in light of the challenges of COVID-19 that have been passed by the Australian Federal Government pursuant to Schedule 12 to the Coronavirus Economic Response Package Omnibus Act 2020 (Cth).
One of the most notable amendments is that the minimum threshold at which creditors can issue a statutory demand has increased from $2,000 to $20,000 for a period of 6 months, and companies will have 6 months to respond to a statutory demand rather than the current 21 days.
The objective of the above amendments is to afford businesses that are struggling to pay their debts with breathing space. Whether this is no more than a band-aid solution and will simply mean that in 6 months’ time there will be a barrage of corporate collapses remains to be seen.
Here at Emerson Lewis Lawyers, we act for a number of secured and unsecured lenders and other trade creditors who have understandably expressed concern about the fact that whilst borrowers will have this much needed breathing space, at the same time they have financial obligations of their own as well as obligations to stakeholders, including shareholders, which they cannot ignore.
A question that has frequently been asked is whether companies can be wound up by creditors in the next six months, other than through the statutory demand mechanism. The answer is that in some situations they still can.
The most common situation in which a company is wound up in insolvency is when it fails to comply with a statutory demand. The failure to comply with a statutory demand gives rise to what is known as a presumption of insolvency under section 459C of the Corporations Act 2001 (Cth)(Act).
However, it is often overlooked that there are a few other circumstances in which a company will be presumed to be insolvent under section 459C(2) of the Act, which can then be relied upon by a plaintiff in applying to wind up a company. Examples include where, within three months of the winding up application being made:
- a creditor who has the benefit of a judgment debt has obtained a writ for levy of property and the writ has been returned by a sheriff’s office unsatisfied;
- a receiver was appointed over any of the property of a company;
- a person enters into possession or assumed control of property of a company for the purpose of enforcing a security interest.
It is noteworthy that the recent amendments to insolvency and corporations laws appear to have left the operation of the above presumptions of insolvency (other than those relating to statutory demands) unaffected. One wonders whether this was an oversight or a conscious recognition that it is something of a rarity for companies to be wound up in insolvency other than in the context of an unsatisfied statutory demand.
Emerson Lewis remains available and committed to assist its clients in navigating their way through the turbulent times that lie ahead.