Stopping the Zombie Business Apocalypse

Towards the end of 2020 there was concern about a number of corporate businesses that were seen to be still trading or “surviving” simply because of the insolvency protections and other grants and stimulus provided by the Government as a result of the COVID-19 pandemic. Some of these businesses would have ordinarily been wound up under the insolvency provisions in the Corporations Act. The term “Zombie Businesses” was coined by several industry groups to describe companies that should have been wound-up but for the relief and protection provisions introduced as a result of COVID-19.

The 2020 year came to an end on 31 December and with it, a number of the changes that created insolvency protections for companies also came to an end.

Pre-COVID, under sec­tion 459E of the Cor­po­ra­tions Act, a cred­i­tor could issue a statu­to­ry demand against a com­pa­ny demand­ing pay­ment of a debt of at least $2,000 (the Statu­to­ry Min­i­mum) provided it was properly due and payable. The com­pa­ny then had 21 days after being served with the statu­to­ry demand to pay the amount, reach an agree­ment with the cred­i­tor about the debt, or apply to one of the higher courts to have the statu­to­ry demand set aside.

If a com­pa­ny failed to respond to the demand with­in 21 days, it was pre­sumed to be insol­vent and the cred­i­tor was entitled to make an appli­ca­tion to court for the com­pa­ny to be wound up in insol­ven­cy and a liq­uida­tor be appoint­ed to the company.

COVID-19 impacted the whole of Australia in a way like never before and the Coro­n­avirus Eco­nom­ic Response Pack­age Omnibus Act 2020 made changes to a host of legislation, including the Corporations Act. A number of those changes related to the statu­to­ry demand process to protect companies that might otherwise have no ability to properly deal with a statutory demand issued during the pandemic.

Generally speaking, the protective changes:

1. increased the Statu­to­ry Min­i­mum from $2,000 to $20,000 – mean­ing that a cred­i­tor had to have a much larg­er debt owing to it before a statu­to­ry demand could be issued; and
2. extended the time for a com­pa­ny to respond to a statu­to­ry demand from 21 days to six (6) months — mean­ing that the com­pa­ny had much more time to deal with a statu­to­ry demand, reduc­ing the pres­sure on the com­pa­ny to either pay, provide a quick response or risk being wound up for insolvency.

As of 1 January 2021 these protections ceased and the legislation reverted to the previous position unless the company is eligible for further temporary restructuring relief and makes a declaration to ASIC between 1 January 2021 and 31 March 2021.

The prescribed form has changed and there are a number of other nuances that people issuing a statutory demand will need to be aware of, however, the bottom line is if you need to serve a statu­to­ry demand, or you receive one, you should be aware that as from 1 Jan­u­ary 2021, the time in which to deal with a statutory demand is back to being only 21 days.

Companies will also need to ensure they are able to pay debts of $2,000 or more as and when they fall due, or otherwise risk being mistaken by creditors as a Zombie Business and having a statutory demand issued. The statutory demand process has very serious consequences and can ultimately cause a company to be wound-up under the provisions of the Corporations Act. Companies that have been served with a statutory demand should seek legal advice as soon as possible to assess if the changes impact their individual circumstances. For more information, speak to one of our commercial litigation solicitors.