As a consequence of the financial impact that COVID-19 has had on the economy, Australia has entered a recession for the first time in 29 years.
If your business is experiencing financial difficulties as a consequence of the COVID-19 pandemic, now is the time to seek advice with respect to the various restructure options detailed further below.
Businesses are currently being subjected to significant financial distress. In response to that distress, a variety of measures, government and non-government, have been implemented to assist businesses to continue to trade during the COVID-19 pandemic.
Marino Law has previously detailed the various measures that have been introduced to assist businesses during the COVID-19 pandemic. In this regard, please see our article “COVID-19 Impact on Commercial Dealings”.
Pursuant to the above measures:
- the time within which:
- an individual debtor is required to comply with a bankruptcy notice; and
- a corporate debtor is required to comply with a creditors statutory demand,
has been temporarily extended from 21 days to six 6 months;
- there are now temporary increases to the threshold at which creditors can issue a:
- bankruptcy notice (from $5,000.00 to $20,000); and
- creditors statutory demand (from $2,000.00 to $20,000.00);
- directors of corporate businesses will not be personally liable for debts incurred during defined periods during the COVID-19 pandemic as long as those debts are incurred during the ordinary course of the company’s business;
- the various State governments have enacted laws to implement the National Cabinet’s Mandatory Code of Conduct (the “Code”) pursuant to which, during defined periods:
- parties to commercial leases are required to negotiate appropriate rental waivers and deferrals; and
- tenancy evictions are essentially suspended. For more detail regarding the implementation of the Code in Queensland, please see our previous article, ‘Queensland’s new retail and commercial leasing laws explained‘;
- eligible businesses can apply to receive $1,500.00 per eligible employee per fortnight;
- businesses can apply for assistance packages from the government; and
- businesses can apply for various forms of relief with respect to mortgage payments to be made to commercial banks.
What happens when the above measures come to an end?
The above measures effectively enable distressed businesses to survive during the COVID-19 pandemic. However, once those measures cease, we expect to see a perfect storm of claims directed towards such entities.
Marino Law is already aware of numerous creditors that are owed money from distressed businesses and are simply waiting for the debt recovery restrictions to cease so that they can issue statutory demands and bankruptcy notices, or commence recovery and eviction proceedings, against recalcitrant tenants for example.
Businesses are being impacted in a variety of ways by COVID-19, with the above measures perhaps simply delaying inevitable bankruptcy or external administration for those who were suffering severe financial distress before the COVID-19 pandemic hit.
For other businesses that were operating profitably prior to the pandemic, the resulting falling revenues and increasing debt levels now see them suffering distress. Once the above measures cease, they may be called upon to repay debts that have been effectively deferred during the COVID-19 period. This could see such businesses face significant claims from various creditors at the same time, that could ultimately lead to bankruptcy or external administration where relevant.
Restructure options
While benefiting from the temporary measures referred to above, businesses are now presented with an opportunity to restructure their operations in order to continue operating solvently once the temporary assistance stops.
Marino Law can work with businesses now to implement various informal and formal measures to restructure their business operations.
Distressed businesses can engage in informal measures such as negotiating debt restructures with a businesses’ creditors that could lead to the forgiveness of debt and/or the extension of the time within which a debt is to be repaid. Such measures can be more readily implemented now before creditors start to aggressively chase debts when the temporary measures referred to in the above paragraphs are lifted. While such measures can be cheap and quickly implemented, their effectiveness can be limited where deals can be done with some creditors but not others such that recovery action is taken that ultimately leads to the appointment to the business of a bankruptcy trustee or liquidator as the case may be.
Distressed businesses can also restructure their operations through asset and business sales to related and unrelated third parties. While such measures may enable a business to transfer assets or a business to a related entity for example that does not have the same debt restrictions, care needs to be taken to ensure that the transaction is not an illegal phoenix or a voidable transaction that a liquidator subsequently appointed to that company could claw back.
Recent amendments to the Corporations Act 2001 (Cth) give a liquidator the power with respect to creditor-defeating dispositions, being transfers of company assets for less than market value that prevent, hinder or significantly delay creditors’ access to the company’s assets in a liquidation. Advice should be sought from a professional advisor such as a lawyer, accountant or insolvency practitioner before entering into such transactions.
Businesses suffering financial distress can also look to implement formal measures available to them in the Bankruptcy Act 1966 (Cth) and the Corporations Act 2001 (Cth). Such measures include:
- the appointment of a voluntary administrator. Pursuant to the administration process, a distressed business could be sold or restructured by the administrator. By entering into a Deed of Company Arrangement for example, the debts of the distressed business could be restructured such that the operation of the business is able to continue past the appointment of the administrator;
- the entry into formal agreements with an individual’s personal creditors. Unlike an informal debt negotiation, such agreements if agreed to by a majority of an individual’s creditors, are binding on all creditors. However, if an agreement cannot be reached, any creditor can use that fact as the basis for the commencement of bankruptcy proceedings against that individual; and
- in the direst of situations, the appointment of a liquidator or bankruptcy trustee as the case may be.
Marino Law has extensive experience acting for directors, liquidators, administrators, lenders, brokers, financiers and creditors in the administration of all corporate and personal insolvency appointments.
Our highly experienced lawyers regularly advise clients in the following areas of corporate and personal insolvency:
- voluntary administrations;
- liquidations;
- business and asset sales;
- enforcement of securities;
- statutory demands and bankruptcy notices; and
- debt agreements and personal insolvency agreements.
Should you require assistance in any of the above areas, please contact our team on 07 5526 0157.
