Increase statutory demand threshold for small business debts?

As a part of the government COVID-19 economic measures to help small businesses avoid insolvency, in March 2020, the threshold at which a statutory demand could be issued to business was temporarily increased to $20,000 and the timeframe in which the creditors had to respond to the demand was temporarily increased to six months. These temporarily changes expired on 31 December 2020 and the statutory demand threshold has reverted back to $2,000.

In a bid to complement the recently implemented small business insolvency measures, the government is currently consulting various stakeholders to determine whether or not to permanently raise the minimum threshold at which creditors can issue a statutory demand on a company.

As a refresher, the new insolvency measures contain a debt restructuring process which allows eligible companies to restructure their debts and maximise the opportunity of the business continuing. Specifically, it also provides relief in relation to responding to statutory demands from creditors where a company is waiting to access a debt restructuring process.

Essentially, a statutory demand is a formal, written request requiring a company to pay a debt that is due and payable. The main purpose of the statutory demand is to establish proof of a company’s inability to pay its debts and does so by creating a rebuttable statutory presumption of insolvency where a company fails to respond to a demand that has been served.

In cases where a company fails to respond to the statutory demand within the allotted time, it is common for the company to enter into liquidation as the affected creditor can use the presumption of insolvency to apply to the court to have the company wound up.

As with any change, there are pros and cons to an increase in the threshold. For debtor companies, an increase in the threshold might mean a better chance at restructuring for small debts. In essence, they would not have to spend money to pay the debt and apply to the court to have the statutory demand set aside, which can prove costly and unnecessarily push the company into liquidation.

For creditor companies, any increase in the statutory demand threshold will obviously reduce the ability of some to take action against debtors. This may lead to undesirable consequences for both the debtor and creditor company such as being unable to recover the debt, or where creditors decide to manage the risk of non-payment through higher interest rates on unpaid amounts/loans or requiring cash on delivery.

On the other hand, creditors may also benefit from an increase in the threshold in that they may enter negotiations with debtor companies for unpaid debts instead of issuing legal demands for $2,000 which could be costly. Ultimately, negotiation could lead to a better outcome for both parties.

The government also pointed out various general benefits of increasing the threshold including having a representative figure as the current statutory demand threshold (ie the figure of $2,000 has not been updated since being legislated in 1992), and harmonisation between the personal bankruptcy threshold (of $10,000) and the statutory demand threshold to provide consistency.

Increase statutory demand threshold for small business debts? Have an opinion?

If you run a business, you will no doubt be a creditor to some and debtor to others, so this potential change will definitely affect how you run your business in the future. If you want a say in whether the statutory demand threshold should be increased, contact us today.

Hunter Partners are Accountants, Tax Agents and Financial Planners. We can assist you with all aspect of your accounting, tax and financial planning requirements, call Hunter Partners on (07) 4723-1223.