29 April 2020

PRESS RELEASE: Insolvency protections don’t go far enough to help struggling companies

Articles resulting from this press release include: Government told to safeguard business by extending insolvency relief  (My Business - 30 April 2020) and Temporary insolvency relief extended until year’s end (My Business - 7 Sept 2020) by Maja Garaca Djurdjevic

A six-month moratorium aimed at preventing companies falling into insolvency could simply delay the collapse of a large number of businesses.

Head of commercial disputes at Bartier Perry Gavin Stuart warned the Federal Government could need to extend its moratorium protecting Directors whose companies are trading while insolvent.

“Come September, many Directors whose businesses are struggling will then have to rely on the existing Safe Harbour legislation, which like Chapter 11 bankruptcy laws in the United States aims to help businesses restructure and trade through tough times,” he said.

“The reality though is that even before COVID-19 very few smaller to medium-sized Australian companies used these laws because of the complexity, cost and confusion that surrounds them.”

Mr Stuart said economic hibernation would only exacerbate the challenges Directors faced in seeking to enact Safe Harbour laws which protect them from being personally liable if their business trades while insolvent.

“As an example, a company only qualifies for Safe Harbour protection if all its employee payments are up to date and it has complied with its tax reporting obligations. How realistic will that scenario be for many businesses whose cashflow has dried up? This is not a case of business owners not wanting to fulfil their obligations but rather we are in an environment where many simply can’t.”

The existing Safe Harbour protection also requires a Director to develop and implement a course of action that is reasonably likely to lead to a better outcome for the business than administration or liquidation.

“The reality is that debts such as rent or finance repayments and interest, whilst currently deferred temporarily, continue to accrue during the COVID -19 hibernation period and will require repayment some time in the future,” said Mr Stuart. “Potentially the financial position of a business could be significantly worse than it was pre COVID-19 making the development of a course of action reasonably likely to lead to a better outcome all the more difficult. Particularly as is expected by many, a return to pre COVID-19 levels of business activity and cashflow takes time,” said Mr Stuart.

“Whilst an immediate return to pre COVID-19 business activity, employment and confidence levels is to be hoped for, the reality may not be so.”

Mr Stuart said the Government could either extend the moratorium on insolvent trading with respect to debts incurred during the COVDI-19 pandemic or amend the existing Safe Harbour legislation to make it easier and less costly for businesses to trade through continuing tough times.

“The Federal Government has given companies welcome breathing space,” said Mr Stuart

“Now it has to weigh up the risk of a huge wave of companies collapsing just as the economy reopens or extending and amending legislation to give Directors and the businesses they run every chance to trade through one of the greatest economic downturns of our lifetime.”

Mr Stuart said while the focus has been on the collapse of large companies such as Virgin, the economic impact of insolvency on just a small percentage of the 700,000 plus Australian businesses that have 20 plus employees could prove far more significant.