Disruption – Update to Insolvency Laws

23 March 2020

Dear all,

Matters relating to COVID-19 are evolving quickly. Information that was relevant only days ago is quickly being overtaken and superseded by new developments. Such considerations add further pressure to an economy already burdened by the effects of the recent bushfires and a general slowing in market conditions. Already this year, the market has seen the insolvency of McWilliams Wines Group, Jeanswest, Colette and Kikki-K to name a few.

Yesterday, in further measures to improve the economic impact of COVID-19, the Treasurer announced, among other things, that:

  • Creditors: the threshold amount to issue a statutory demand will rise from $2,000 to $20,000 (with the equivalent for a bankruptcy notice to increase from $5,000 to $20,000);
  • Companies and Individuals: will have 6 months to respond rather than the usual 21 days; and
  • Directors: will be temporarily relieved of their duty to prevent insolvent trading with respect to any debts incurred in the ordinary course of the company’s business.

The above measures are designed to provide companies with the confidence to continue to trade through the COVID-19 crisis with a view to returning to viability when the crisis has passed.  The changes are expected to come into place shortly – but we will have to wait for the proposed legislation for further detail.

In addition to the above new changes, business and individuals should at times of disruption also consider, among others:

  • Cashflow position: falling demand and revenues are creating cashflow difficulties and working capital stress. Cash-flow analysis is one of the primary means by which the financial health and solvency is determined in Australia. In the current environment, more than ever, companies need to be thinking about:
    • the availability of credit;
    • optimising their working capital position by properly managing their receivables, payables and inventory management systems and processes;
    • engaging with their landlords and their financial and trade creditor stakeholders with a view to obtaining time or payment indulgence;
    • considering the availability of Government or financier assistance policies; and
    • exploring the availability of parental guarantees as well as letters of support along with cash in order to meet liabilities when they become due and owing;
  • Employment Issues: it is essential that companies be able to make quick and difficult decisions about the continuation or transition of their workforce in its present form as well decisions about employee safety and employee entitlements. Priority must also be afforded to continuity plans, communications with workers and stakeholders, flexible work arrangementsgrant , potential agreed ‘stand down’ options and the proposed treatment of leave payments and entitlements;
  • Force Majeure or Frustration Events: material contract should be reviewed to determine contractual rights, obligations and options. Many contracts will contain provisions that seek to deal with matters that are (as is the case with COVID-19) outside the control of both parties. If no such provisions apply, consideration should be devoted to whether it is possible to create optional arrangements by agreement or by alternate means;
  • Insolvent Trading/Safe Harbour: as mentioned above it appears the Government is moving towards a temporary reprieve from the duty to prevent insolvent trading. However, the precise content of the proposed legislation has not yet been released. For that reason, prudence and ‘good practice’ recommends that directors seek to avail of the safe harbour regime where possible. The rigour of that process and the premium that it places on good corporate governance, reasoned and documented restructuring plans and stakeholders engagement will go some way to ensuring that directors and officers are well placed to comply with their myriad of duties (given that their duties and obligations extend beyond the prohibition on insolvent trading); and
  • Ensure you and your staff continue to observe government guidelines concerning Social Distancing and Hygiene protocols.

Our National Insolvency teams have experience working closely with directors, boards and companies to help them navigate through this very difficult period. There are a number of solutions that we can provide to our clients to ensure that they have adequate advice protection and continuation of their businesses where possible.

This article was written by Grant Whatley, Partner, Jonathan Kramersh, Partner, Richard Johnson, Partner and Alison Robertson, Partner.

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