Covid-19
The coronavirus will inevitably have an adverse impact on business and take its toll on the human element of both business and our social lives.
Factors of risk include:
Vanishing customers and revenue, especially for: hospitality; retail / wholesale of consumer & capital goods; and tourism-related businesses.
Supply chain dislocation, contractual issues (with respect to, among others, force majeure & termination rights and remedies), breaches of financial covenants to bankers & financiers and legal / moral obligations to employees.
Market disclosure for public companies.
The solvency of businesses will undoubtedly be a daily preoccupation for directors and officers alike.
B2B Lawyers have over 20 years’ experience providing assistance and “street wise” advice to support you and your businesses in times of need. Over this period, we have assisted clients to grapple with, and emerge from, at least 3 major recessions. There is always a Plan B.
Directors have an explicit duty to ensure that a Company is solvent - that a Company is able to pay its debts as and when they fall due. It is important to note that this is a cashflow test (ie an assessment of the Company's financial health based on its ability to meet its short-term debt payment obligations), and not a balance sheet test (which focuses on the net value of the Company's assets over liabilities).
A director must be alert to acting reasonably in assessing whether a Company is insolvent, or may become insolvent, when a debt is incurred.
However, the recently enacted safe harbour regime contained within the relevant provisions of the Corporations Act (Cth) 2001 can give a director comfort and protection from the threat (and the worry) of incurring a personal liability. Safe harbour defences are designed to give directors confidence to continue to operate their businesses in times of uncertainty by concentrating on fine tuning and sustaining their businesses - rather than being distracted by the threat and stress associated with personal liability.
It is important to note that the implementation of a safe harbour strategy is not designed to completely absolve directors and officers of their general and specific duties (particularly with respect to meeting their obligations to the ATO in relation to employee entitlements, superannuation, GST, PAYG and OHS). However they do afford directors time to take proper advice on what steps to take without worrying about becoming personally liable while doing so.
To date, there has been no judicial guidance regarding the application of the safe harbour regime. Unfortunately, it is likely to be assessed retrospectively. Therefore, care should be taken with all record keeping, minuting of meetings and instructions for valuation & evaluation of a business and its assets and liabilities (including contingent liabilities). The same care should be taken with regard to any advice given as to implementing and complying with any plan put in place.
Implicit in the availability of the safe harbour defence is the need for the Board to put in place a plan to “start developing one or more courses of action” reasonably likely to lead to a “better outcome” for the company as opposed to early liquidation or voluntary administration (section 588GA(1)(a)) Corporations Act.
Section 588GA(2) provides a non-exhaustive list of examples of what might be needed so that there is a better outcome to liquidation or voluntary administration. Those include:
Members of the Board ascertaining the company’s true financial position.
Ensuring that the company is keeping proper financial records.
Taking reasonable steps to have prepared and, if appropriate, implementing a plan for restructuring the company to improve its financial position.
ensuring that employee entitlements are being paid as they fall due.
ensure that there is compliance in lodging tax documentation when due.
Obtaining advice after proper provision of all relevant information from insolvency and legal advisors on the financial and emotional viability of the plan and its implementation. The underlying principles that there be a materially better result for stake holders (including creditors, employees and shareholders) than would be achieved via liquidation or voluntary administration.
The defence applies to debts incurred as a consequence of designing and implementing ‘courses of action’ - but not necessarily all debts. However, if the planned course of action ultimately provides for business continuity to trade debts incurred in the ordinary course of business then any such debts may be considered safe harbour debts. If that is the case, it is feasible that protection would be afforded against most, if not all, debt.
On the 23rd March 2020 the Government announced the following temporary measures for financially distressed businesses whilst not law yet, it is unlikely there will be any other obstruction to their passages;
· Increasing the minimum amount for a creditor to issue a statutory demand to a company from $2,000 to $20,000;
· Increasing the threshold at which a creditor can initiate bankruptcy proceedings from $5,000 to $20,000; increasing the time both companies and individual debtors have to respond to statutory demands or bankruptcy notices from 21 days to 6 months; and
· Relieving directors from their duty to prevent insolvent trading with respect to any debts incurred in the ordinary course of the company’s business. In effect, absent some “egregious dishonesty or fraud” directors may avoid personal liability for insolvent trading regardless of whether they have been taking “safe harbour” steps. Holding companies may also avoid liability for insolvent trading by shareholders.
The temporary measures are intended to apply for a period of 6 months from commencement of the enabling legislation and are in addition to the various stimulus packages and other measures that have recently been announced. For example, it is also intended that the ATO will adopt more “tailored” solutions for business that are struggling in the pandemic which relevantly includes withholding taking certain enforcement action such as issuing Director Penalty Notices and winding up proceedings.
It appears that directors’ other duties remain unchanged and directors will still need to consider whether debts are being incurred in the “ordinary course of business”. In what is universally acknowledged to be unprecedented circumstances, this concept may be significantly broader then previously envisaged.
It also appears that the voidable transaction regimes will not be affected. In circumstances where many businesses are forced to close their doors but continue to trade in some capacity it is likely to be difficult for a creditor to argue that they have not received an unfair preference payment and have no grounds to suspect that the debtor was insolvent.
It is a time to be concerned, but not to despair. B2B Lawyers can assist you to navigate these turbulent times.
Separately, B2B Lawyers can advise you in relation to more orthodox strategies for asset protection such that in the event there is a financial disaster, there may be a remaining asset base to provide some financial security and the ability to reinvent.
The Partners at B2B Lawyers are taking COVID-19 pandemic seriously to ensure the health and safety of all employees and clients.
We will, until otherwise directed by the Government, remain open for business and will be here to assist you. As with all businesses, circumstances are such that we are tweaking the way we operate to ensure that we continue to provide uninterrupted assistance. Your understanding and patience is greatly appreciated. In this regard, we would be more inclined at this juncture to hold telephone conferences (where possible) instead of face-to-face meetings.
Should we be required to lock-down the offices, our staff will be equipped to work remotely from home to ensure there will be minimal (or no) disruption.
We all need to work together to get through this difficult time. Take care of each other.