CHANGES TO INSOLVENCY LAW AND EFFECT ON DEBT RECOVERY FOR STRATA SCHEMES

On 24 March 2020, Coronavirus Economic Response Package Omnibus Bill 2020 received assent. The effect of the bill is to soften the economic and financial effects COVID-19 is having on Australian individuals and corporations. Included in the Bill are changes to the Bankruptcy Act 1966, Bankruptcy Regulations 1996 and the Corporations Act 2001.

The changes came into effect and became operational on 25 March 2020. They will be repealed in 6 months (unless extended).

Changes to Personal Insolvency/Bankruptcy – Individual Debts

The changes to the Bankruptcy Act and Regulations include:

  • A bankruptcy notice may not be issued in respect of a debt that is less than $20,000
  • A debtor who has been served with a bankruptcy notice has 6 months from the date of service of the notice to comply with it or apply to set it aside
  • A creditor’s petition may not be issued for an amount of less than $20,000

The 21 day period on bankruptcy notices issued on or before 24 March 2020 has not been changed. Accordingly, if on or before 24 March 2020, a body corporate filed/lodged a bankruptcy notice against a debtor for a debt of less than $20,000 the debtor will need to comply with the notice within 21 days; however, you will not be able to issue a creditor’s petition unless the cumulative debt is $20,000 or more.

It is important to remember that the sum claimed in a creditor’s petition will include the judgment sum, plus additional unpaid levies and legal costs. So, while the bankruptcy notice may be for a sum less than $20,000 a creditor’s petition may be still be able to be issued for $20,000 or more.

Changes to Corporate Insolvency – Company Debts

The changes to the Corporations Act 2001 only affect creditor’s statutory demands (CSD), not winding up applications. These changes include:

  • A creditor may serve a CSD on a company where the debt is at least $20,000
  • The CSD must specify the amount payable and must require the company to pay the amount or to secure or compound for that amount or total to the creditor’s reasonable
    satisfaction, within 6 months after the CSD is served on the company
  • The period for compliance with the CSD is 6 months after the demand is served
  • A company may apply to the Court for an order setting aside the CSD within 6 months of being served with the demand. The application to set aside the CSD and affidavit in support must be filed and served within the statutory period.

As a result of these changes, if on or before 24 March 2020, a body corporate issued a CSD to a corporate lot owner (debtor) for a debt of less than $20,000:

  • If it was served on or before 24 March 2020, the debtor will need to comply with the demand within 21 days. If the debtor fails to comply with the demand within 21 days and does not apply to set aside the demand, then you will be able to apply to wind up the company even if the debt is less than $20,000
  • If it has been or will be served on or after 25 March 2020, the CSD is now invalid and will need to be withdrawn

Alternative Debt Collection Methods

Please note these changes, at their core, prevent a court from making a sequestration order or winding up order for a period of 6 months.

However, you can still commence proceedings in the courts seeking judgment for unpaid levies. Once you have a judgment there are a range of alternative debt collection measures available to you including:

  • Garnishee Order in respect to wages, funds in bank accounts and/ or rental payments
  • Writ for levy of property
  • Writ for levy of land
  • Payment by instalments
  • Demands on mortgagees

Impact on Debt Recovery

Contrary to some views, the changes to the insolvency laws do not currently impact any other stages of the debt recovery process. These new laws only affect those matters currently pursuing enforcement of outstanding arrears by personal or corporate insolvency avenues such as bankruptcy or winding up. If you have any matters at this stage of recovery, you should seek advice from the scheme’s debt recovery agent or lawyer on next steps.

Bodies Corporate can continue to instruct strata managers to take their usual steps of issuing reminder and demand notices to lot owners in arrears or entering into payment plans to pay arrears. Thereafter, debt recovery agents and law firms can still issue demands, claims and other methods of enforcement listed in the alternative debt collection methods above.

Schemes should be mindful that in circumstances where all methods of enforcement are fully exhausted, they may have to wait until after the insolvency laws are automatically repealed on 24 September 2020 (unless extended) to pursue insolvency against individuals or companies. In this instance, debt recovery action may in effect be stalled against certain lot owners for at least the next 6 months.

This update should be read in conjunction with our update sent earlier this week titled
‘Should we still continue with debt collection during the Covid-19 Crisis?’.

Grace Lawyers is an industry leader in the recovery of unpaid strata levies. Please get in touch with us if you would like to discuss how these changes affect you or if you would like advice on how best to enforce your debt during these difficult times.