How Coronavirus (COVID-19) affects Defaults and Statutory Demands?

With the unprecedented upheaval following the spread of Coronavirus (COVID-19), more and more businesses are temporarily closing their doors and/or having their staff work remotely off site to mitigate the spread of the virus. 

Whilst the Coronavirus (COVID-19) has already caused considerable disruption, this now presents a further risk – that of companies unknowingly facing default judgments being entered against them in Court, as well as statutory demands inadvertently not being complied with, due to their registered offices being unmanned.  The consequences are potentially catastrophic.

Even though the Courts are taking measures in response to the virus by deferring hearings, using video conferencing and applying other technology, the Court Rules and standard procedures remain in place. 

Service by mail

Court proceedings brought against companies, as well as statutory demands, are both typically instigated by the relevant documentation being ‘served’ on the company by ordinary post, to its registered office. The rules provide that a document may be served on a company by leaving it at, or posting it to, the company’s registered office.[1] 

In most occasions, this is either the company’s trading address or the address of its accountants. 

Whilst permissible, it is not a formal requirement that the document actually be given personally to a director.  Further, if the registered office is a business address, there is no requirement that the business be open or trading at that time. 

Risk of not monitoring mail

Given the present state of affairs, and impending office lockdowns and closures, there is every risk of documentation being validly served on a company by post to an unmanned office and not actually coming to anybody’s attention.  

As such, it is imperative that companies have measures in place to ensure that their ordinary physical mail is being checked in a timely fashion.  If it is not, there is a severe risk of either:

• a judgment in default being obtained against the company if a Court proceeding is issued against it, served and then not defended (the judgment is then immediately recorded against the company’s credit file); or

• a statutory demand not being complied with, which paves the way for a creditor to issue a winding up application against the company and have a liquidator appointed.[2]

Court Proceedings

Court Proceedings are typically initiated by a Writ, Originating Process, Complaint (a Writ in the Magistrates’ Court) or other application being served on a company by being sent to a company’s registered office by post.

Debt claims for instance, are most commonly issued in the Magistrates’ Court or County Court of Victoria, depending on the amount being claimed.  The time frame to respond varies as follows: 

• with a Magistrates’ Court Complaint, if a Defence is not filed with the Court within 21 days of the Complaint being served, the Plaintiff can obtain a judgment in default of defence.[3]

• with a County Court writ, if a Notice of Appearance is not filed with the Court within 10 days of the writ being served, the creditor can apply to obtain a judgment in default of appearance.[4] 

In both instances, as well as being immediately devastating to a company’s credit rating, the creditor will also typically obtain an order for legal costs and interest on top of the debt and can begin enforcement proceedings against the company. 

Further, this may mean that you are in default of other agreements, enabling other parties to terminate agreements you thought were not at risk, or, for example, call up a loan.

Provided they were validly served, it is no excuse to say that the document(s) didn’t actually come to anyone’s attention.

Creditor’s Statutory Demand for Payment of Debt

This is a statutory process whereby a creditor who is owed a debt of at least $2,000 can serve a demand for payment on a company.[5]As of 25 March 2020, this limit has temporarily been increased to $20,000. 

Crucially, there is a strict 21 day deadline for compliance from the date of service.  Whilst this is ordinarily 21 days from the date of service, where the date of service is on or after 25 March 2020, the deadline has temporarily been increased to 6 months from the date of service. Within that time, the company needs to:[6]

• pay the debt in full; or

• settle the debt to the creditor’s satisfaction; or

• bring an application to set aside the demand and serve that application on the creditor.[7]

If the company doesn’t do any of the above the applicable deadline, it is presumed to be insolvent.[8]

This then enables the creditor to bring an application in the Supreme or Federal Court to wind up the company, which may result in a liquidator being appointed if not opposed.

The 21 day deadline is strict and cannot be extended. 

As such, it is imperative to ensure that processes are in place to ensure that mail being sent to the company’s registered office is:

• still being monitored;

• that the date it is received is being correctly recorded; and

• that any Court proceedings, statutory demands or other legal notices are actioned in a timely fashion to avoid significant inconvenience, potentially considerable legal costs being incurred and at worst, your company facing liquidation. 

How can DSA Law help?

If you have a bankruptcy or insolvency issue, please Contact Us or one of the Commercial Lawyers at DSA Law on (03) 8595 9580 so we can assist you with your concerns.[9]

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[1] Corporations Act 2001 (Cth) s 109X

[2] Corporations Act 2001 (Cth) s 459F.

[3] Magistrates Court Civil Procedure Rules 2018 (Vic) r 21.02.

[4] County Court Civil Procedure Rules 2018 (Vic) r 21.01.

[5] ibid s 459E.

[6] Corporations Act 2001 (Cth) s 9.

[7] ibid s 459G.

[8] Corporations Act 2001 (Cth) s 459F.

[9] To know more regarding bankruptcy or insolvency, you can find out by reading the articles, “What is a Voluntary Administration” and “What happens when you declare bankruptcy”.