James Conomos participates in the IR Global Insolvency Virtual Series – Insolvency & Restructuring: How the global pandemic changed the rules on insolvency

James ConomosFounder and Principal Partner, James Conomos Lawyers

Foreward by Andrew Chilvers

Insolvency and restructuring legislation changed radically in all jurisdictions in the wake of COVID-19. While governments have tried to delay the number of insolvencies in the short term, most experts agree that distressed businesses will start to fail significantly later this year and into 2021.

For insolvency practitioners and lawyers alike, the pandemic has posed problems that have not been seen on a global scale in more than 100 years. Many businesses have faced sudden and catastrophic closures along with the evaporation of their revenue as emergency lockdowns have been implemented across all jurisdictions in an attempt to control the virus.

And now as lockdown measures have eased around the globe, those companies still functioning may well be tipped over the edge into insolvency by the loss of trade during and post the pandemic. No surprise then that later this year, the number of company insolvencies and liquidations is predicted to soar.

This provides the challenge for insolvency professionals; how to retain value and restructure decent businesses that were robust and profitable before March, while allowing zombie businesses to naturally fail?

Are different governments introducing new legislative or country regimes that allow for restructuring over liquidation? There is no legislation that allows restructuring, so how does it preserve its economic value?

In March, the Australian Government introduced the Coronavirus Economic Response Package Omnibus Bill 2020, which made temporary changes to the Corporations Act 2001 and the Bankruptcy Act 1966.

Three main changes were, firstly, under the Corporations Act 2001, where directors are relieved from the duty to prevent insolvent trading and can avoid personal liability except if debts are incurred dishonestly or fraudulently.

Secondly, parties seeking to recover debts from companies are faced with significant delays. If a party has a debt owing by a company, which is not disputed, under the Corporations Act 2001 the party can issue a document called a Creditor’s Statutory Demand for Payment of a Debt. The recipient usually has 21 days to comply or apply to set it aside. Under the COVID legislation, this time was extended to six months.

Thirdly, parties seeking recovery from an individual are faced with delays. If a party has a debt, which is the subject of a judgment, a common way to pursue recovery is to issue a Bankruptcy Notice. The recipient usually has 21 days to comply or apply to set it aside. Again, the time was extended to six months.

These changes have given protection for business by allowing breathing space in respect of debts owed, but at the same time it has given creditors the opportunity to delay payment to business, which is not necessarily helpful.

The changes – which have largely had positive feedback – last until 23 September, but I expect these will be extended as the full effects of the pandemic will be felt post September and there is likely to be a significant escalation in insolvencies then.

Australia’s insolvency laws provide mechanisms to assist business and individuals to restructure their affairs and minimise even further the harmful effects of the pandemic. Delay is the enemy for business, particularly once the stimulus initiatives and temporary relief end.

Do “rushed through” insolvency measures address both large enterprises and small and medium-sized companies? Is there legislation pending to address this in your jurisdiction?

The changes have been of significant assistance for small business. The stimulus initiatives and temporary relief changes have given breathing space especially for small business, particularly because the ability to delay payment allows small business to survive and avoid failure. These changes, as well as other packages offered during COVID and the lack of pursuit by the Australian Taxation Office of tax revenue, has given small-to-medium business a cause for pause.

That cause will cease once the assistance available comes to an end in late September and the true effects of the pandemic are faced by all.

Experience tell us that the cessation of the stimulus initiatives and temporary relief changes, coupled with increased activity by all debtors including the Australian Taxation Office, as well as the general decline in activity over the Christmas/new year period, will lead to a significant uptake in insolvency appointments.

For large enterprises, the stimulus initiatives and temporary relief changes have had some effect, but have not cured the problems and whilst appointments overall are down, the number of large organisations to fall during the pandemic have been significant. These include Virgin, but there are also many large companies shedding significant numbers of staff or making significant changes including:

• Three of the big four accounting firms offloading significant numbers of staff

• Myer in Melbourne offloading significant numbers of staff

• News Corp closing over 100 regional papers with 500 jobs lost

• ABC shedding 250 jobs.

Some of these businesses would not be expected to be so heavily affected by the pandemic, but the effects do not spare many. A possible exception might be food retailers. It is reported that Woolworths has recorded a large increase in jobs while at the same time looking at reducing jobs including by automation.

This pandemic will spare no one.

With the “light touch administration” processes now being implemented in different jurisdictions, does this give too much power back to directors? What are the potential risks for the office holder?

In the UK, a solution available for companies with a strong potential for long-term viability is a type of formal administration known as ‘light touch administration’. This process is particularly suited to larger companies with a high physical presence who have seen their trade decline due to enforced closure of their retail or trading space. Although stores have been made to shut temporarily, if there is the prospect of a viable business once we return to a sense of normality, then light touch administration could be an attractive solution.

Once a company enters administration, whether a light touch administration or not, a moratorium is issued that prevents legal action from outstanding creditors, giving the company time and space and the ability to formulate a viable plan for the future direction of the business.

This could involve the business continuing to trade following a process of restructuring or refinancing, entry into an alternative formal business rescue process.

In Australia, businesses, large and small, can avail themselves of the voluntary administration process, which, it would seem, can achieve the same outcomes as the ‘light touch administration’.

Traditionally, a voluntary administration can achieve any outcome if agreed by creditors and often the agreement will encompass a moratorium and time to restructure or pay debts.

Care needs to be taken to ensure that the solution fits the company, but the process is intended to be flexible and accommodate any conceivable outcome.

Creditors decide in the voluntary administration process. There are sometimes winners and losers, but if prejudiced those prejudiced can challenge the arrangement.

In Australia, we are well placed to assist large and small business, but the challenge is to encourage directors not to delay and to seek advice promptly to enable a sensible solution to modeled promptly and in a competitive way.