While the Federal Government's stimulus packages have been a welcome relief to all, the question remains as to what we are supposed to do in six months' time when the various codes of conduct, bank goodwill measures and other temporary pauses on enforcement all come to an end? At some stage, the Government will have to open the gates and landlords, financiers and other creditors who are currently left to lick their wounds will be allowed to roam free and exercise their statutory and contractual rights. Sure, the Government could seek to extend some of these relief measures but as surely as night follows day, a day of reckoning will eventually arrive.
One of the concerns of many advisers which I share is that the measures to a large extent simply 'kick the can down the road' for a period. Whilst the waves of insolvency collapses that generally go hand in hand with an economic shock have been put on hold, rest assured that those waves may build into a tsunami in about 12 months' time or less which itself may lead to further damage to a fragile economy.
A different and better strategy
The law already provides a mechanism for companies to restructure – this is covered by the voluntary administration regime of the Corporations Act (Part 5.3A). One of the outcomes envisaged by voluntary administration is a deed of company arrangement where the directors of the troubled company put forward a proposal (an arrangement) that will deal with the financial affairs of the company in a way that is expected to provide a better outcome to creditors and other stakeholders than simply winding up the company. The arrangement typically has involved a compromise of creditor claims where creditors get 'X' cents in the dollar on their debts and claims.
An often-overlooked type of arrangement is one that essentially provides for a 'moratorium' on all creditor claims, sometimes referred to as a 'holding deed of company arrangement'. It may or may not also involve a compromise of creditors. The fairly recent (2018) High Court decision in Mighty River International v Hughes supports the use of such arrangements.
Government measures are essentially a de facto 'holding doca' for businesses
What the Morrison Government has essentially done with its various stimulus measures is to 'impose' such a moratorium for all businesses. The problem with these measures is that they involve 'codes of conduct' for commercial landlords, the implicit temporary agreement/understanding of banks not to enforce their rights and securities and temporarily changing enforcement rights of creditors to prevent a wave of liquidations.
Moreover, the measures do not cover all lenders and in this era private lenders or so called 'shadow banks' occupy a significant piece of the finance landscape; they are currently free to exercise their respective rights and powers. Furthermore, as yet there does not appear to be any legislation by States to deal with residential tenancies and all other suppliers and creditors are still able to issue legal proceedings albeit the use of a creditor's statutory demand has been 'slowed' (with debtor companies having six months to comply instead of the usual 21 days). Meanwhile, insolvent trading rules have been relaxed somewhat, which may turn out not to be such a great idea in 12 months' time.
A 'moratorium' deed of company arrangement
Some of the benefits of implementing a deed of company arrangement with a 'general and wide moratorium' are:
- That you can specify a significantly longer term than 6 months for the moratorium on creditor claims- for example an 18-month term or potentially longer if some payments were made along the way to creditors
- the moratorium will cover all creditor claims and not just those that are currently 'paused' by the Government measures. This will enable owners to properly consider a business restructure, re-capitalisation or refinance
- in this environment, you are more likely to get the support of landlords and external creditors such as the Commissioner of Taxation provided you can demonstrate that the business is likely to get back to its pre-COVID-19 state or otherwise result in a better outcome overall for creditors than liquidation
- the directors may, as part of the arrangement, be able to negotiate the benefit of a stay on claims that may otherwise be made against them under personal guarantees
In summary, you would be putting in place a real and holistic financial solution for the long term rather than a piecemeal and fragmented approach. Indeed, you may prevent a potential and inevitable liquidation in 6-12 months' time when the Government measures cease, and the wolves are released!
Where we can help
We have been operating in the insolvency, restructuring and litigation area for over 40 years and have assisted literally thousands of business owners over that time. We have one of the largest and most experienced insolvency legal teams in Australia and have worked on some of the largest insolvencies and reconstructions in Australia. We also have a deep network of external and independent advisers who we can call upon to assist us implementing our strategies.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Madgwicks is a member of Meritas, one of the world's largest law firm alliances.
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