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Australia:
Alternative avenues of relief for creditors to recover debts during COVID-19
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Effective from 25 March 2020, the Australian Government has
implemented
economic measures to provide relief for financially distressed
individuals and businesses affected by COVID-19.
These measures, discussed in our
previous article, will be in place for the next 6 months. Among
others, these measures include:
- increasing the current minimum threshold for statutory demands
from $ 2,000 to $ 20,000 - increasing the statutory timeframe for a company to respond to
a statutory demand from 21 days to 6 months - increasing the minimum amount of debt required to initiate
bankruptcy proceedings against a debtor from $ 5,000 to $ 20,000 - increasing the timeframe a debtor has to respond to a
bankruptcy notice from 21 days to 6 months.
Nonetheless, the Australian Government has made it clear that
these measures are not intended to be a freeze on debt recovery
processes all together,
noting:
“Creditors, many of whom are
themselves small businesses, will still have the right to enforce
debt against companies or individuals through the
courts. “
Businesses should be aware that while the relatively low cost
and effective option of a statutory demand may not be as readily
available, that there remain other avenues when seeking to enforce
an outstanding debt.
Through the Courts
Creditors are still able to enforce their debts through the
Courts and other that the above restrictions, there are currently
no general COVID-19 restrictions on commencing legal action.
The Small Claims Division of the Local Court has jurisdiction to
hear debt recovery claims up to $ 20,000. This provides a relatively
efficient and lower cost option for debt recovery.
Claims of up to $ 100,000 are heard in the General Division of
the Local Court.
For more significant claims, the District Court generally has
jurisdiction for debt recovery claims under $ 750,000, with claims
above this heard in the Supreme Court of NSW.
Once the originating process (usually called a Statement of
Claim) is filed and served, the debtor will have 28 days to respond
to the claim by filing a defense. If they fail to do so within this
timeframe, the creditor may then apply for default judgment.
The entry of a default judgment can have significant impact on a
debtor’s credit history and ability to obtain finance, so that
in itself can be an effective tool where the debtor has some
capacity to make payment, with a payment plan able to be
negotiated.
After a judgment is obtained, a creditor may be able to enforce
the judgment in a number of ways including:
- garnishee order – an order on the debtor’s bank or
other party that would otherwise be making payment to the debtor to
instead pay the money to the creditor in payment of the debt - writ of execution – which involves the Sheriff
repossessing property owned by the debtor and selling it to realize
the debt - charging order – which allows the creditor to lodge a
caveat over real estate owned by the debtor, preventing or delaying
the debtor from selling that real estate.
Building and Construction Security of Payment Act 1999
(NSW)
For those businesses operating in the construction industry in
NSW, or who supply goods or services to the industry, the Building
and Construction Industry Security of Payment Act 1999 still offers
an effective process to maintain cash flow for contractors.
The process of serving a payment claim and providing a strict
timeframe for disputing the claim, provides a contractor with
rights if the timeframes are not complied with. These can
include:
- a right to suspend work
- a right to commence legal proceedings without the other party
being able to lodge a defense to the claim - a right to require the principal to withhold money due to a
head contractor and instead pay it to the subcontractor who is
unpaid.
Of course, there are various steps required before a contractor
can legally take this action, and legal advice should be obtained
before doing so.
Key takeaways
- Australian Government has implemented economic measures to
provide relief for financially distressed individuals and
businesses, however, these measures are not intended to be a freeze
on debt recovery by creditors - While the ‘big stick’ of a statutory demand or threat
of bankruptcy proceedings may not be as readily available, there
still remain avenues available for creditors to enforce debts - Businesses should be aware of these avenues and their rights to
ensure their own cash flow remains steady during this fast-changing
and uncertain COVID-19 crisis.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
