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Financial distress and your safety net during COVID-19

Temporary changes to insolvency laws mean businesses have a safety net so they can resume normal operations once the crisis has passed. This includes an increase to the statutory demand limit (to $20,000), and extended protections for directors against personal liability for trading whilst insolvent.

This safety net, however, is due to expire on 24 September 2020 and businesses can then expect sudden and aggressive debt recovery measures from creditors including the ATO.

Please join our webinar with insolvency experts Robert Champney and
Rebecca Forsyth who will discuss with you:
Changes to occur from 25 September - statutory demands, bankruptcy notices, and obligations as a director;
Debt recovery options available to your clients to improve cash flow; and
“Red flags” that determine financial distress, what options are available to restructure, and the need for proactive conversations with your client and legal advisors

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Financial distress and your safety net during COVID-19

  1. 1. Financial distress and your safety net during COVID-19 Robert Champney, Director Rebecca Forsyth, Associate
  2. 2. PresentingWednesdays with RedchipWebinar Robert Champney Director Rob take a ‘hands-on’ approach to his role as Director of Redchip’s Litigation team, striving to identify the key issues early in any dispute and to deliver pragmatic, commercial advice to protect and advance his client’s position. Rebecca Forsyth Associate Rebecca acts for clients in litigation and commercial matters across a range of areas including property and trust disputes, intellectual property and employee theft, debt recovery, lease disputes, director and company disputes, fiduciary duties and general commercial disputes.
  3. 3. Amendments to the Corporations Act
  4. 4. Amendments to the Corporations Act On 25 March 2020 the Federal Government amended the Corporations Act 2001 (Cth) in response to the COVID-19 pandemic. The purpose of the amendments to create a safety net for businesses whilst they dealt with the sudden and dramatic decline in revenue as a result of COVID-19, and to prevent a wave of collapsing small and medium businesses across the country.
  5. 5. Summary of amendments to Corporations Act For companies Increasing the threshold for a statutory demand (to $20,000) and extending the time for a debtor company to comply with the statutory demand (to 6 months).
  6. 6. Summary of amendments to Corporations Act For directors Protection from personal liability for insolvent trading in relation to debts incurred by the company from 25 March to 24 September 2020.
  7. 7. Summary of amendments to Corporations Act For individuals Increasing the threshold for a bankruptcy notice (to $20,000) and extending the time for a person to comply with the bankruptcy notice (to 6 months).
  8. 8. The amendments are due to expire on 24 September 2020 Dropping the safety net
  9. 9. From 25 September: Statutory demands Creditors will be able to issue statutory demands for any debt over $2,000.A debtor company will only have 21 days to: • pay the amount demanded; • negotiate a settlement with the creditor; or • file an application inCourt to set aside the demand. If the debtor company fails to do so within the 21 days, it risks being wound up in insolvency and a liquidator appointed.
  10. 10. From 25 September: Directors’ liability for insolvent trading • Directors’ protection from personal liability for insolvent trading will come to an end. • For all companies who are continuing to trade after 25 September 2020 but are unable to pay their debts as and when they fall due, the directors will be personally liable for all debts incurred by the company. • A claim for insolvent trading can be made by a liquidator appointed to the company (for all unpaid debts), or by a creditor.
  11. 11. From 25 September: Bankruptcy notices Creditors will be able to issue bankruptcy notices for any judgment debt over $5,000. A person will only have 21 days to: • pay the amount demanded; • negotiate a settlement; or • file an application to Court to set aside the bankruptcy notice. If the person fails to do so within the 21 days, they risk the creditor making an application to Court for a sequestration order and the appointment of a trustee in bankruptcy. Importantly, a creditor must still obtain a judgment from a Court before issuing a bankruptcy notice
  12. 12. What to expect? Businesses can expect sudden and aggressive debt recovery measures from creditors from 25 September 2020, including the ATO. That might include: • statutory demands being issued to companies for debts incurred in the last six months, with winding up proceedings commenced if the company fails to comply with the demand; • creditors commencing proceedings against individuals for guaranteed debts, and issuing bankruptcy notices once judgment is obtained; and • once a company goes into liquidation, insolvent trading claims being brought against directors personally.
  13. 13. Unfortunately, directors will, over coming months, be faced with the prospect of evaluating whether their business has the financial health to survive and push through, or whether the business cannot continue (at least in its present form). Early intervention
  14. 14. Early intervention cont. Proactive conversations are often be the difference between a business that survives and a business that fails (or between a director being personally exposed). Accountants are well placed to have those hard conversations with their clients, given their trusted role as advisors and in-depth knowledge of their clients’ businesses.
  15. 15. Red flags for companies
  16. 16. Red flags for companies There are many signs that a business is struggling financially or is insolvent. Some of the first red flags that will be visible to accountants and advisors are: • Being asked to negotiate payment arrangements (or extensions of payment arrangements) with theATO, banks, or other creditors. • Existing funding arrangements being withdrawn or restricted. • Receiving creditors statutory demands or court proceedings at the company’s registered office.
  17. 17. Red flags for companies cont. • Directors receiving directors’ penalty notices (DPNs) from the ATO or demands under personal guarantees. • Disorganised or incomplete books and records, or a delay in having financial statements prepared. • Breaching payment plans. • Significant aged debtors – it becomes increasingly difficult to recover debts over 60 days.
  18. 18. Red flags for directors
  19. 19. Red flags for directors Some directors may be particularly vulnerable, such as where: • they are personally liable for the company’s debts, because: o they have given personal guarantees, such as a lease; o the company has outstanding tax or superannuation liabilities; or o the company may be trading while insolvent.
  20. 20. • They hold a QBCC licence or other professional registration that is affected by bankruptcy or liquidation of their company; • They own significant assets in their own name; or • They have had previous companies go into liquidation. Red flags for directors cont.
  21. 21. Restructuring or external administration?
  22. 22. Restructuring or external administration Where a company is unable to continue trading profitably or has seen business debts accrue to an unmanageable level during a period of downturn such as during the COVID-19 pandemic, restructuring or external administration can offer a way out. Options include……..
  23. 23. Voluntary Administration and a Deed of Company Arrangement (DOCA) Pros: • If the DOCA is approved, the directors can continue to run the company with a clear plan for settling the debts of creditors. • The terms of the DOCA can be flexibly crafted to suit the business and its creditors. • Can be a better outcome for creditors, shareholders and directors than a liquidation.
  24. 24. Voluntary Administration and a Deed of Company Arrangement (DOCA) Cons: • The administrators will incur fees which need to be paid in priority to creditors or other parties. • Voluntary administration or the entry into a DOCA may be the trigger for creditors to enforce personal guarantees, for financiers or investors to withdraw or restrict funding. • It can damage creditor relationships which are needed to trade the company into the future.
  25. 25. Business Sale (Legal Phoenix transactions) Pros: • If done correctly, the business can be salvaged and legally sold to a new entity who can continue to run it free of the old company’s debt.
  26. 26. Cons: • The assets and goodwill of the business must be properly valued. • The new entity must pay fair market value in the transaction. • The directors may still face personal liability for claims by the ATO or creditors of the old company. Business Sale (Legal Phoenix transactions)
  27. 27. Liquidation Pros: • If done early, directors can avoid, or reduce, personal liability for the company’s outstanding taxation, superannuation or trading debts. Cons: • The possible loss of the business and its assets. • Liquidation of the company can be the trigger for creditors to enforce personal guarantees against directors.
  28. 28. Restructuring or external administration There is no one-size-fits-all solution, and it is important that directors are given upfront and practical advice about the risks and benefits of any proposed restructure or external administration. Clients should be particularly wary of any proposal that sounds too good to be true.With the rise of pre-insolvency “advisors”, we have seen directors face significant personal liability and penalties because of being poorly advised.
  29. 29. Settlement negotiations
  30. 30. Settlement negotiations Negotiated settlements with creditors can be a viable alternative to external administration. However it is important that these negotiations are undertaken sensitively, and with a clear understanding of the likely outcomes in liquidation or voluntary administration as an alternative.
  31. 31. Settlement negotiations cont. In the current climate, creditors may pursue debt recovery actions more aggressively than normal (or be less likely to agree to deferred payment arrangements), especially if: • they are themselves experiencing financial hardship or cashflow shortages; or • they have been waiting since March to recover monies owed to them.
  32. 32. Settlement negotiations cont. This makes it more important for clients to negotiate proactively with their creditors. Ideally this occurs before a statutory demand or claim is issued.At the very least, it should occur as soon as possible to avoid being backed into a corner. If your client is negotiating with multiple creditors, that is a red flag for you to consider their more general financial health.
  33. 33. Insolvent trading claims
  34. 34. Insolvent trading claims • Directors can also expect liquidators to pursue insolvent trading claims aggressively, if companies do go into liquidation, as a means to recover funds in the liquidation. • Defences to a claim for insolvent trading can be difficult to run, particularly where there were signs that the company was struggling financially that should have been apparent to the director.
  35. 35. Insolvent trading claims cont. • Liquidators will rarely commence proceedings without warning. Often the key factor in resolving an insolvent trading claim commercially is getting good advice as soon as a demand is received, and before the liquidator has a chance to commence proceedings.This will often result in a better commercial outcome for the director.
  36. 36. Options for debt recovery
  37. 37. Options for debt recovery While the amendments have been a welcome relief for many businesses and business owners, they have also caused cashflow difficulties and financial hardship for others who have been unable to rely on statutory demands and bankruptcy notices to recover monies owed to them.
  38. 38. Options for debt recovery cont. Many creditors have been waiting for these amendments to end so that they can take steps to recover from their debtors. Options include: • Statutory demands – Often the focus is on fast, cost-effective debt recovery and statutory demands are ideal where there is no genuine dispute that the money is owed. • Enforcing security interests over secured assets. • Court proceedings. • Monies owed for building work - there are a range of additional options including adjudication, subcontractors’ charges and complaints to the QBCC.
  39. 39. Your questions are important Please send them through using the Q&A section 07 3223 6100
  40. 40. Thank you for tuning in