Coronavirus and debt recovery

COVID-19 and Debt Collection

In business, cash is king but with COVID-19 our worlds have been thrown upside down. What can we do – with sensitivity in these difficult times – to recover money owed to a business?

In these difficult times of COVID-19 and the corona virus, how do you recover debts owing to a business?

1. Re-negotiate your supply terms

Some B2B customers may have reduced or suspended trading activity due to the NSW Government’s ban on social gatherings1 or the Federal Government encouraging an economic hibernation.2

Your customer may be entitled to a refund for cancellation of prepaid services, under the supply terms and conditions or under Australian Consumer Law.

In the case of a B2B customer who owes you money for goods or services already delivered, you may wish to think about extending the deadline for your tax invoice. Check first with your accountant so that you can factor in how much delay in receivables your business can tolerate.

Ideally, the extended deadline would be negotiated directly with the B2B customer and clearly documented in writing. Your B2B customer may agree in writing that they owe you the money and you may agree to a slight delay of the deadline for payment.

Keep in mind that your B2B customers who qualify for payments under government stimulus packages such as the Job Keeper allowance may be in a better financial position by the first week of May. This is when the Australian Taxation Office is due to distribute this government stimulus package.

2. Statement of Claim to collect the debt

NSW courts have vacated hearings/trials in civil proceedings until 1 May 2020, due to the coronavirus pandemic, but there is still the opportunity to prepare your case in the meantime. Under COVID19 Directions issued so far by NSW courts, it is still possible to start court proceedings by the usual arrangements of your business lawyer filing a Statement of Claim online and distributing documents to parties electronically.

Lawyers are permitted to represent you in court via telephone for small claims matters and via a virtual courtroom for procedural directions in preparation of larger matters. Contact us to discuss with a business lawyer the preparation of your case, including collecting evidence.

3. Issuing a Creditor’s Statutory Demand for Debt (changes due to COVID-19)

One way to coax payment of monies a company owes you is to send the company a Statutory Demand for Debt. The company faces the risk of being wound up if they fail to pay you the debt within the legislated time period of its receipt of the Statutory Demand. For more details on how this works, please see our previous blog on this topic.

Since 23 March 2020 and for the next six months up to 22 September 2020:

  • the minimum amount claimable under a Statutory Demand for Debt is $20,000, and not the usual $2000; and
  • the debtor company has six months to respond, not the usual time period of 21 days from service of the Statutory Demand for Debt on the company.3

Even if the amount of money owing to you by the debtor company exceeds $20,000, the debtor company cannot be wound up until the expiry of the six months period. In the meantime, the debtor company may well accumulate debts to others.

Even if you do succeed in receiving payment from the company during that six-month period, a liquidator may seek to claim back the payments as a ‘voidable transaction’ if shown to be:

  • an insolvent and uncommercial transaction, or
  • an insolvent transaction with a related entity of the debtor company, or
  • for the purpose of defeating, delaying, or interfering with, the rights of any of its creditors on a winding up of the company.4

Expect the unexpected in company law with the Minister now having the power to make Orders for lessening the potential impact of coronavirus pandemic by modifying or exempting the application of the parts of the Corporations Act generally or in relation to specified classes of persons.5

4. Suing the directors personally for the debts of an insolvent company (suspended due to COVID-19)

This is usually the last port of call when a debt is not recoverable any other way. However, company directors’ duties to prevent insolvent trading of a company have been suspended for a six-month period commencing 23 March 2020.6

As discussed in our previous blog, under section 588G of the Corporations Act a director may be personally liable to pay the debts of a company that is trading whilst insolvent, unless the Safe Harbour provisions apply under section 588GA due to the directors taking timely and meaningful action to achieve a better outcome for the debtor company.

5. Issue a Bankruptcy Notice against a partnership or a sole trader (changes due to COVID-19)

Usually, a person who owes money in excess of $5000 can be declared bankrupt if they fail to pay to comply with a valid Bankruptcy Notice within 21 days.7 Most commonly, bankruptcy notices are issued by creditors due to failure of the debtor to pay a judgement debt from a court case. For the six-month time period of 23 March until 22 September 2020, the statutory threshold amount and time period are suspended for a period of six months. During this period of suspension, a Bankruptcy Notice cannot be issued for debts less than $20,000 and the debtor has six months 6 months to respond to a Bankruptcy Notice.8

Which debt recovery process suits your situation during the coronavirus pandemic?

Even during the COVID-19 pandemic, legal processes are available for you to claim monies owing to you. While the courts and #covid19australia laws have made changes the debtor’s time schedules, you will eventually have your case heard to receive your money back, it is not lost.

Contact us today on 02 8065 8810 for an initial free consultation and to find out more about how we can help you.

Stevensen Business Lawyers has assisted clients in commercial disputes in the Local Court of New South Wales, the District Court of New South Wales, the Supreme Court of New South Wales and the Federal Court of Australia.

References:

  1. Public Health COVID-19 Restrictions on Gathering and Movement Order 2020 made by the NSW Minister for Health on 30 March 2020,
  2. Coronavirus Economic Response Package Omnibus Bill 2020 (Cth) dated 23 March 2020,
  3. Regulation 5.4.01AA Corporations Regulations 2001 commencing 23 March 2020,
  4. Section 588FE Corporations Act 2001 (Cth),
  5. Section 1362A Coronavirus Economic Response Package Omnibus Bill 2020 (Cth) 23 March 2020,
  6. Section 588GAAA Corporations Act 2001 (Cth) commencing 23 March 2020,
  7. Section 41 Bankruptcy Act 1966 (Cth),
  8. Regulation 4.02AA Bankruptcy Regulations 1996 (Cth) commencing 23 March 2020.