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An expected extension – It came without ribbons. It came without tags. It came without packages, boxes, or bags.

The Federal Government has announced it will extend the temporary changes to the insolvent trading regime and statutory demands until 31 December 2020. Our summary of the changes is available in our previous article here

Relevantly the extension means that until 31 December 2020, there will be: 

  1. relief from directors’ personal liability for trading while insolvent; and 
  2. six months to comply with a statutory demand with the threshold remaining extended from $2,000 to $20,000.

This announcement is not unexpected given the initial measures were due to expire at the end of this month. The Federal Government was arguably faced with little option but to extend in circumstances where a large number of businesses have clearly not planned for a reversion to the old law. Whilst these measures will be welcomed by many directors and businesses, the underlying distress faced by many businesses continues to remain unaddressed.  

It is true that the measures (coupled with the JobKeeper subsidies) have achieved their aim of staving off the wave of insolvencies to date. Official numbers from ASIC show formal insolvency appointments down 50% compared to 2019 levels. These figures are however misleading. The legislative changes have not cured distressed business but rather prolonged the inevitable, especially for SME businesses. 

For many debt-laden companies this extension may, in the absence of appropriate advice and contingency planning, diminish further the returns available to creditors or alternatively the opportunity to restructure or recapitalise. Many businesses continue to exhaust their underlying cash positions and burn through goodwill as suppliers and creditors remain unpaid.   

Whilst the measures provide ongoing breathing room there now needs to be active encouragement from the Federal Government and financial institutions for distressed businesses to begin to take active steps and to work with advisors and stakeholders to save as many businesses as possible or in the absence of that to maximise the opportunity for creditors to obtain a return. This will likely involve hard decisions but those that act timely and with purpose will be best placed to come out the other side – be that under the protection of the safe harbour or through a formal restructure. 

Key takeaways  

  1. Act now – distressed businesses cannot bank on further extensions and must begin to act now. Any restructure or recapitalisation plan (be it informally or through an insolvency process) will take time to plan. 
  2. Active planning and engagement – directors of companies in distress should be looking to undertake contingency planning now (including considering the worst-case scenario for the business), and a key part of this should be engaging with key stakeholders of the businesses. 
  3. Directors’ duties – directors have ongoing duties during this time including to act in the best interests of the company and this must include considering ways to address structural issues within a business (a ‘head in the sand’ mentality doesn’t cut it).
  4. Safe Harbour – the safe harbour provisions contained in section 5588GA of the Corporations Act 2001 (Cth) provide a sound roadmap for formulating a contingency plan and way forward. Further details of the safe harbour can be found here.
  5. Certainty of protection – assuming directors can avail themselves of the broader safe harbour regime these protections will extend beyond any temporary measures and can in fact be taken advantage of now. 
  6. Voluntary administration – the voluntary administration regime is a viable option to restructure or recapitalise a business. For some businesses, especially those with insurmountable debts or unprofitable contracts or leases, voluntary administration may be the only way to ensure survival.  
  7. DOCAs – proponents of deeds of company arrangements may be able to opportunistically acquire businesses for less, given there may be limited recoveries available to a liquidator (including any insolvent trading or preference claims).
  8. Dry Powder – for those businesses and funds with strong balance sheets and capital to deploy the coming months are likely to see opportunities to acquire new businesses, competitors and opportunistic bolt-ons to existing businesses. Some useful considerations on distressed M&A can be found here
  9. Beware the Grinch – given the timing of the further extensions the first wave of COVID-19 insolvencies could in fact commence over the coming holiday period. This will likely be shocking for many Australians, but in reality it may also reflect the growing fatigue amongst those individuals managing distressed businesses (especially in Victoria) and a desire to unburden themselves before the new year. 
  10. See point 1. – those businesses that act now, that make difficult decisions and that engage with stakeholders (in particular lenders and key creditors) will maximise their chances for survival in 2021 and beyond.  

The Hamilton Locke Restructuring and Insolvency Team have a broad range of top-tier experience acting for a variety of stakeholders in distressed scenarios.  For more information or advice on how these changes may impact your business or insolvency and restructuring advice generally please contact Nick Edwards, Brit Ibanez and Zina Edwards.