This note considers the amendments made in the Coronavirus Economic Response Package Omnibus Act 2020 (Omnibus Act), to the statutory demands regime provided for in the Corporations Act 2001 (Cth) (Corporations Act), and, in particular, the significance of that amended regime to the construction industry and future windings up in that industry.
In the Omnibus Act, two amendments were made to the statutory demand regime, to provide temporary relief for debtors, as follows:
These amendments were originally set to be in effect for six months (from 25 March 2020), subject to any further amendments or extensions as may be enacted by Parliament. On 22 September 2020, the Corporations and Bankruptcy Legislation Amendment (Extending Temporary Relief for Financially Distressed Businesses and Individuals) Regulations 2020 (Cth) (Extension Regulations) came into effect, extending the time that the amendments would be in effect, to 31 December 2020.
At no time during the operation of the Omnibus Act or the Extension Regulations has there been any clear guidance regarding the manner in which the amendments will cease to operate. Accordingly, it appears as if when the extended period expires at the end of December 2020, and assuming no further extensions are enacted, the regime will immediately return to its normal parameters (eg $2,000 statutory minimum and 21 day statutory period).
Recent, pre-pandemic, estimates put the total amount of unpaid debts in the construction industry each year at approximately $3 billion.[1] Further, as has been well-documented, delayed payments and poor payment practices are endemic in the industry. It is no great surprise, then, that statutory demands are a commonly used tool in the construction industry in particular, to assist with securing payment from recalcitrant trade debtors.
In the normal course, statutory demands can also present a significant risk to a company, as failure to comply with the demand or seek a Court order setting it aside within the statutory period of 21 days can lead to the initiation of a winding up of the company. Moreover, in respect of a company that eventually goes into external administration, the fact of statutory demands having been issued by creditors (even if the underlying debts are eventually paid or otherwise resolved) can be of significance to external administrators (including in, for example, the pursuit of unfair preferences claims).
Given that even in the early stages of the COVID-19 pandemic there were forecasts of industry-wide contraction in 2020 as high as approximately 6% (which now appear as if they may have been optimistic)—as a result of both the pandemic and very low oil prices—the use of statutory demands could only have been expected to increase in the near term, but for the intervention of the Omnibus Act and the later enactment of the Extension Regulations.
While the lift in the statutory minimum will be of minimal practical impact on significant construction projects, the increase in the statutory period from 21 days to six months is likely to significantly change the manner in which statutory demands are used by creditors in the first instance, with flow on effects for any external administrators.
Once a debtor has reached the current new statutory minimum of $20,000 due and payable, a statutory demand may still be served. Given the uncertainty regarding the manner in which the amendments will cease to operate (and the timing thereof), companies may elect to serve a statutory demand as soon as they become entitled to do so, to start the clock ticking on the six month period. Although as the currently scheduled end to the amended regime approaches, some companies may elect not to issue a statutory demand until that period has expired and the statutory period has reverted to 21 days. Companies opting for the latter approach may find their statutory demand becoming due and payable before another company’s statutory demand that was actually issued earlier, but was subject to a six month statutory period. There is some risk in that approach as there is no guarantee that the amended regime won’t be extended further, into 2021.
Furthermore, if creditor companies avoid issuing their statutory demands until expiration of the Omnibus Act amendments, debtor companies may find themselves facing a succession of statutory demands as soon as those amendments expire, which may be more difficult to manage financially and could force some companies into external administration. This is particularly so given that other factors currently impacting project timelines and company cashflow (including low prices for oil and other commodities, supply chain disruptions and personnel restrictions) are likely to continue to be disruptive forces for many more months.
Of course, the Omnibus Act amendments (and the Extension Regulations) do not affect the existence of the debt or the availability of the adjudication processes provided for in the relevant security for payment (SOP) legislation, so companies can still enforce contractual obligations and seek to recover debts through SOP processes or other legal proceedings. As the statutory demand process is a commonly used tool for parties seeking to enforce SOP determinations, this raises further queries regarding the practical extent of the protections offered by the Omnibus Act amendments to the statutory demand regime.
In respect of any companies that do go into external administration, whereas normally an external administrator may expect to see evidence of a period of several months of difficult relationships with creditors, including potentially a number of statutory demands being issued and payment plans or extended payment terms being sought, there may be less evidence in this vein if creditor companies take strategic approaches to attempting to anticipate when the Omnibus Act amendments will come to an end and timing the issuance of any statutory demands accordingly. However, there will still be other indicia of financial distress which an external administrator can marshal in connection with any unfair preferences claims (or similar) that may be under investigation, including things such as failure to comply with payment terms or making payments in round figures rather than in accordance with specific invoices. The election by a creditor company not to issue an early statutory demand, however, may also impact on matters of proof in respect of any statutory defences available to that creditor company.
[1] Senate Economics References Committee, Parliament of Australia, Insolvency in the Australian construction industry (December 2015) xvii. By way of context, ASIC’s data for each financial year since that report reveals the following numbers of external administrations in the industry per year (by reference to its Series 1A statistics): 2014/2015 – 1,591; 2015/2016 – 1,647; 2016/2017 – 1,509; 2017/2018 – 1,354; 2018/2019 – 1,515; 2019/2020 – 1,447. While the statistic for 2019/2020 may seem surprising, it should be remembered that the Australian government took significant steps to assist businesses facing financial difficulty in that financial year, including the measures discussed in this note as well as others outside its scope.
