The Australian government’s response to the COVID-19 pandemic incorporated several changes to insolvency legislation. In short, financially distressed businesses were given temporary relief with increases to the threshold at which creditors can issue a statutory demand (along with a significant extension of time to respond to a statutory demand), as well as relief from directors’ liability for insolvent trading.
These new laws are set to expire at the end of September. Provided the government does not extend the current regime, how do struggling business prepare for insolvency laws to return to ‘normal’? More importantly, how can these businesses survive?
There are a number of other alternatives distressed businesses may avail themselves of under the Corporations Act. These are common pathways that businesses can take at anytime and are not specific to the COVID-19 pandemic. We will discuss each briefly below.
Voluntary Administration with a view to executing a DOCA
Voluntary Administration (VA) is a process by which an administrator takes over the company’s affairs with the authority to continue trading the business as a going concern. This process looks to either increase the chances of the business surviving, or at the very least, result in a better outcome for creditor’s than a liquidation.
A Deed of Company Arrangement (DOCA) is a binding agreement between the company and creditors, which details how the company’s affairs will be administered. The objective is to deal with the affairs in such a way that allows for a better outcome for creditors (over liquidation), and ultimately, allows the company to avoid being wound up.
During the COVID-19 pandemic, many companies utilised what is known as a ‘holding DOCA’. These arrangements effectively placed a ‘pause’ on companies and creditors, with the aim to examine potential restructuring strategies and opportunities to assist the company to remain viable. Many companies that would be thriving, but for the pandemic, found this to be a useful tool in remaining afloat during these challenging times.
Safe Harbour provisions
The Corporations Act provides protection from insolvent trading to directors in circumstances where directors can demonstrate that they are developing a course(s) of action which is reasonably likely to lead to a better outcome for the company. Such action may include potential recapitalisation opportunities, restructuring options, downsizing or the sale of the business.
To utilise the safe harbour regime (and thus, avoiding insolvent trading claims), any debts incurred must be incurred directly or indirectly in connection with the proposed course of action. Therefore, you will not be covered for trading as per usual whilst insolvent. Furthermore, the company must continue to pay employee entitlements and tax obligations.
If your business is struggling to navigate the COVID-19 pandemic and you’re wondering what options you have, or whether any of the above might be practical for you, please contact us for a chat.
Rankin Business Lawyers has extensive experience dealing with insolvency matters and maintains close working relationships with many insolvency accounting firms and appointed liquidators. Our Senior Associate, Francine Clancy, sits on the Committee of Management of Women in Insolvency and Restructuring Victoria and is kept up to date with the latest trends and information in the insolvency space.