How to enforce or recover a debt owed to you during COVID-19

With apologies to Charles Dickens (or “Charlie” as I better knew him), It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair…

It may not be the French revolution we are living through – we are yet to introduce the guillotine – but on days it sometimes feels it.

So, let us consider more weighty matters in a time of coronavirus – how to enforce or recover a debt owed to you.

We will deal in this piece with liquidated debts only – that is to say, debts arising out of a contract and commencing as an outstanding tax invoice.

We will examine firstly the pre-existing situation, and the situation as it now applies post-coronavirus and as a consequence of changes made by the Commonwealth Government in response to the coronavirus crisis.

You need firstly to identify the category of the debtor who owes you money – are they either:

1. A natural person; or
2. A corporation.

Different rules and processes may apply to whichever of the categories the debtor falls into.

Then we need to identify the basis upon which the money is owed to you – is the debt:

1. A judgment debt (that is to say, an order of a Court or Tribunal that the debtor pay you a fixed sum); or
2. Other than a judgment debt – that is to say, an outstanding tax invoice yet to form the basis of a judgment of a Court or Tribunal.

In terms of external administration, a corporation and a natural person ordinarily face two different scenarios:

1. A corporation is placed into liquidation, and a liquidator appointed to conduct its affairs;
2. A natural person is made bankrupt, and a Trustee in Bankruptcy appointed to take over his or her assets and conduct his or her commercial affairs.

So, how does a corporation go into liquidation and how does a natural person go bankrupt?

There are two separate ways.

Where a corporation owes a creditor money, the creditor can prepare and serve on the corporation a Creditor's Statutory Demand for Payment of Debt (“Demand”).  The Demand does not need to be filed with any Court or Tribunal or other Government authority – it is simply prepared by the creditor, signed by it or on its behalf and served on the debtor corporation.

A Demand must be for an amount not less than $2,000.

The corporation then has 21 days to do one of 2 things:

1. To pay the debt the subject of the Demand; or
2. Make application to the Supreme Court or the Federal Court for an order that the Demand be set aside.

If the corporation does neither it is deemed to be insolvent and an application may be made to the Supreme Court or the Federal Court for an order that it be wound up (“liquidated”) and a liquidator appointed to it.

With only a few technical exceptions a corporation cannot oppose that order being made.

Unlike a Bankruptcy Notice directed to a natural person, a Demand need not have as its basis an outstanding judgment of a Court or Tribunal – an outstanding liquidated debt without a supporting judgment is sufficient to found a Demand.

Where a natural person owes a creditor money, the creditor can apply to the Australia Financial Security Authority for the issue of a Bankruptcy Notice directed to that debtor.  However, a Bankruptcy Notice can only be issued on the basis of an existing un-satisfied judgment debt of a Court or Tribunal against the debtor and in favour of the creditor – unlike a Demand directed to a corporation it cannot be served in the basis simply of an outstanding liquidated debt.

A Bankruptcy Notice must be for an amount not less than $1,500.

The natural person then has 21 days to do one of 2 things:

1. To pay the debt the subject of the Bankruptcy Notice; or
2. Make application to the Federal Court or the Federal Circuit Court for an order that the Bankruptcy Notice be set aside or that the time for compliance with the Bankruptcy Notice be extended.

If the natural person does neither he or she is deemed to be insolvent and an application may be made to the Federal Court or the Federal Circuit Court for an order that he or she be made bankrupt (a "Sequestration Order" made in respect of his or her estate) and a Trustee in Bankruptcy appointed to take over his or her assets and his or her commercial affairs.

With only a few technical exceptions a natural person cannot oppose that order being made.

Unlike a Demand directed to a corporation, a Bankruptcy Notice must have as its basis an outstanding judgment of a Court or Tribunal - an outstanding liquidated debt without a supporting judgment is not sufficient to found a Bankruptcy Notice.

So, thus far in summary:

1. A Demand is directed to a debtor corporation by a creditor, claiming a debt due to the creditor, and need not be based on a judgment debt; and
2. A Bankruptcy Notice is directed to a debtor natural person, claiming a debt due to the creditor, but it must be based on a judgment debt of a Court or Tribunal;
3. The corporation must comply with the Demand, or within 21 days make application to set it aside, or it is deemed to be insolvent and may be wound up in insolvency and a liquidator appointed to conduct its affairs;
4. The natural person must comply with the Bankruptcy Notice, or within 21 days make application to set it aside (or have the time for compliance extended), or he or she is deemed to be insolvent and may be made bankrupt (a "Sequestration Order") and a Trustee in Bankruptcy appointed to take over his or her assets and conduct his or her commercial affairs.

What then if a debtor is served with a Demand (as a corporation) or a Bankruptcy Notice (as a natural person)?  What rights does the debtor have? What if any steps must the debtor take to protect itself/himself/herself?

In very general terms it is much more difficult to set aside a Bankruptcy Notice than it is a Demand - that is so simply because all Bankruptcy Notices must have as their basis a judgment debt, whereas most Demands do not have as their basis a judgment debt - ordinarily, a Court will not go behind the judgment of another Court and make a finding as to whether that judgment is proper or appropriate and capable of being enforced.

The important first point to make is that if a recipient of a Demand (a corporation) or a Bankruptcy Notice (a natural person) does nothing and ignores the Demand or Bankruptcy Notice, then almost certainly liquidation (in the case of the corporation) or bankruptcy (in the case of the natural person) will be the consequence.

The second point to make, then, is what if anything can a recipient of a Demand (a corporation) or a Bankruptcy Notice (a natural person) do when so served?

There are essentially only 2 bases upon which a corporation can make application to set aside a Demand:

1. There is a genuine dispute as to the existence or amount of the debt the subject of the Demand;
2. The debtor corporation has an off-setting claim against the creditor.

There are essentially only 3 bases upon which a natural person can make an application to set aside a Bankruptcy Notice:

1. The debtor has made application to set aside the judgment the basis of the Bankruptcy Notice;
2. The debtor can satisfy the Court that he or she has a Counter-claim, set-off or cross-demand exceeding the amount of the Bankruptcy Notice;
3. On the basis of "other grounds".

So, what has changed post-coronavirus?

Essentially, 2 things designed for the benefit of a debtor (be it a corporation or a natural person).

Firstly the minimum amount for both a Demand (previously $2,000) and a Bankruptcy Notice (previously $1,500) has been increased to $20,000.

Secondly, the time to respond to both a Demand (previously 21 days) and a Bankruptcy Notice (previously 21 days) has now been increased to 6 months.

The intent of these changes is plainly to impose a moratorium on debt recovery processes so as to enable a breathing space for debtors faced with the difficult if not dire financial circumstances brought about by the coronavirus.

The changes mean that a creditor will not have to take into account very keen commercial consideration as to whether or not to pursue a debt by means of a Demand or a Bankruptcy Notice.

If you need legal advice following the financial impacts of COVID-19, please contact Connolly Suthers.