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    Extension to Insolvency Relief Measures

    Sep 29, 2020 4:53:35 PM

    On 7th September 2020 the Federal Government announced that they would be extending the Insolvency Relief measures that were legislated in March 2020 due to the Covid-19 pandemic.

    These measures will be extended to 31st December 2020 and include the following:

    Insolvent Trading - Directors will have temporary relief from personal claims for trading whilst insolvent for debts incurred during the relief period and in the ordinary course of business. This does not cover statutory or common law directors’ duties; and

    Statutory demand - The temporary increase will remain at $20,000 and the time companies have to respond will remain at 6 months.

    These extensions are expected in light of the ongoing restrictions, but they certainly raise some interesting questions as to whether the government is just ‘kicking the can down the road’ or genuinely providing relief to businesses.

    It is apparent that the government wants to give every opportunity for businesses to adapt to the impacts of COVID. We have seen the most significant changes for businesses have been with employees, rent, tax and aggressive creditors.

    The government has thrown everything at this problem to try and solidify the economy in light of the continuing impacts of COVID.

    The real question is whether these measures are simply keeping bad businesses alive or whether they are genuinely providing relief. Undoubtedly the answer is yes to both!

    There are bad businesses that should have failed and are now riding the JobKeeper wave. There are good businesses who have been devastated by COVID and are genuinely seeing day to day relief through these measures. Then, there are businesses that are gaining from these relief measures by manipulating their books and records to achieve certain results.

    If the government policy continues in this way, we will see a steady pour of corporate insolvencies, rather than a flood. As government measures ease and the economy starts to come back, we will start to see more and more businesses stop the stimulus and support which has underpinned their business during this period. It is very likely that these businesses will not be able to survive and will enter the insolvency statistics.

    We have identified three core groups to watch:

    Landlords and Guarantee Enforcement will change

    We see this litigation as an increasingly important area. Commercial tenancy has dramatically changed as businesses have rapidly adopted work from home or flexible work arrangements.

    Our Prediction:

    Tenants will default on leases and go into liquidation in much greater numbers than before.

    Landlords will call on personal guarantees as they will not be able to fill the space as quickly as they once could.

    Takeaway:

    Tenants needs to be careful about personal guarantees and the risks that are now more present than ever.

    Landlords need to know their rights in liquidation and their rights under any guarantees given.

    Safe Harbour and Informal Turnarounds will increase

    We believe we will see informal turnarounds and the use of the Safe Harbour regime to be a significant aspect of the COVID recovery.

    Our Prediction:

    Many more businesses will use the Safe Harbour provisions to affect a turnaround.

    Takeaway:

    It is important to get advice from qualified experts to know your standing and know what options your business has. It Is also necessary to do so in a timely manner to risk further exposure for your business.

    Deed of Company Arrangements (DOCAs) will rise

    We see DOCAs as an instrument that will rise rapidly in light of the current environment.

    Our Prediction:

    Many more DOCAs will be entered into and the major loser will be the ATO.

    Takeaway:

    Similarly, it is important to get advice from qualified experts in a timely manner. That is the best way to know your position and what next steps you need to take.

    We see that there are great opportunities available to businesses who are ready, willing and able to adapt. Therefore, those who get expert advice in a timely manner will be in the best position to capitalise on the legislative and economic reforms.

    If you have further questions please contact us at frank@franklaw.com.au.

    This is not legal advice.