The COVID-19 pandemic has presented enormous challenges for businesses, both big and small. Federal and State Governments have tried to meet those challenges through the introduction of various stimulus packages aimed at assisting businesses that are in distress. That being said, unfortunately there were many businesses that were struggling pre-COVID and those difficulties are now compounded by the COVID pandemic.
While those businesses are being given an artificial support, and that support will certainly assist them in the short term, those support packages will end at which point they will, we anticipate, find themselves in an even more distressed position particularly where businesses incurred additional debt to survive the pandemic.
To assist companies to continue during the pandemic, the Federal Government enacted the Coronavirus Economic Response Package Omnibus Act 2020 which introduced a number of amendments to the Corporations Act 2001(Cth) including:-
- Increased the debt threshold for a Statutory Demand to $20,000;
- Extended the time for compliance with a Statutory Demand to 6 months; and
- Provided relief to directors from the duty to prevent insolvent trading.
In addition to this, the Australian Taxation Office has also stayed the commencement of enforcement action during the COVID-19 period.
While these amendments will assist companies in the short terms, once the 6-month period expires (our concern is that) those companies will face a tidal wave of claims. While we believe the Government’s policies are well intended and aimed principally at protecting jobs, we believe that for many companies it is simply a case of “kicking the can down the road”. Given the amendments to the Corporations Act will expire on 25 September 2020, it is important for businesses to plan and model what their business landscape looks like at that time.
What is a Restructure and how does it work?
There are various types of restructure options, and generally it is essential to obtain the right advice in relation to what restructure option is appropriate in the circumstances.
A restructure is simply a restructure of the entity or entities operating a business that allows the business to continue to trade and be viable moving into the future.
A very simple restructure would involve a company trading a business that sold its business and assets for value (subject to appropriate valuations) to a third- party entity that does not carry the same debt load as the initial entity.
The Corporations Act has a variety of options that involve flexibility to companies and their directors to restructure an entity to ensure that the business continues to trade into the future despite having incurred debts as a result of a downturn in trading.
An informal restructure involves businesses going to its creditors to individually negotiate a restructure of the debt, typically through a mixture of debt forgiveness and extension of payment terms. One arrangement with one creditor may be very different to another creditor and an arrangement with one creditor does not bind other creditors.
By contrast, a formal restructure is a mechanism under the Corporations Act that involves the appointment of an external administrator, either a voluntary administrator or liquidator. The differences between a voluntary administrator and liquidator are sometimes described as a non-fatal and fatal, i.e. will the business survive or not survive the external appointment.
The principal objective of a voluntary administration is to obtain a better return to creditors that what would be achieved through a liquidation through the execution of a deed of company arrangement. Once a company exists voluntary administration and enters into a DOCA, not only is employment as well as creditor relationships preserved, but the companies business (typically) continues. The pre-administration debt position (excluding secured debts) are captured by the terms of the DOCA and all unsecured creditors are bound by its terms regardless as to whether or not they voted in favour of the DOCA or not. If a DOCA is accepted, it can, and often does, result in a marked compromise of debt and once that compromise is secured, it enables the company to grow into the future without being burdened by the legacy debt.
Although some of these options may seem complex, our experts are across the laws and the options that you have in your company is suffering a growing or difficult debt load.
Bounce Back Effect
It has been forecast that Australia’s GDP may decline by as much as 6.7% as a consequence of the COVID-19 pandemic, such a decline has not been seen since the Great Depression. However, there is hope that there will be a bounce back following the normalisation of the political and economic circumstances. Remembering that the economic downturn is the result of a “Black Swan” event and not any fundamental flaw in the economy itself.
It is possible that we could see a recovery that results in strong economic growth within the next 3 years. As such, it is essential that businesses take advantage of the COVID-19 laws to restructure and position themselves to take advantage of growth and new business opportunities. If your business continues to carry a significant debt load, new business opportunities may not be possible.
Now is the time to start planning
Planning and then implementing a strategy for restructure takes time. If you believe that your business might benefit from a restructure then now is the time to speak to us, but certainly before the Coronavirus response package expiring in September.
Our lawyers are experts in insolvency and restructuring. We work with experienced accountants and insolvency practitioners to achieve the best outcome for you and your business.