In terms of responding to the Covid-19 Pandemic, Australia’s response was telling. From the early stages of the Pandemic, they took a hard stance. When it came time to start reopening their economy, the country took a measured approach. They are far ahead of many other countries in terms of their response to the Pandemic.
Over the past few weeks, we have been profiling the response of different countries to the Pandemic that was recently highlighted in an infographic by Insol International. We started with South Africa, we then looked at the US and the UK.
In the last instalment of this series, we look at the Australian Government’s response to the Pandemic. Our focus will be through the lenses of: legislative reforms impacting on stakeholders dealing with companies in financial distress, and, legislative reforms for companies in financial distress.
Legislative reforms impacting on stakeholders dealing with companies in financial distress
The boosting cash flow, Job Keeper and Job Maker initiatives noted above have specifically helped employees via job retention, income support and additional training and education opportunities to transition to new jobs as a result of structural changes brought about by the pandemic.
Lenders have benefited from the RBA, AOFM and APRA measures identified above, as well as the 50% loan guarantees provided by the Government under the COVID-19 SME Guarantee Scheme.
The greater regulatory flexibility provided to lenders, along with direct access to cheaper wholesale funds and security arrangements, has in turn enabled lenders to offer support to distressed businesses, particularly SMEs, impacted by the pandemic-related economic downturn.
Legislative reforms for companies in financial distress
Revision of obligations of directors and managers
The Omnibus Act introduced a new safe harbour provision in section 588GAAA of the Corporations Act 2001 (Cth) (Corporations Act), so that directors were no longer liable for insolvent trading in relation to any debt incurred by the company in the six-month period from 25 March 2020 to 25 September 2020. This was later extended until 31 December 2020.
Importantly, apart from the insolvent trading safe harbour, directors’ other statutory and general law duties to the company have continued to apply throughout the pandemic, so that directors may still be held liable for failing to act with reasonable care and diligence, in good faith in the best interests of the company and for a proper purpose, or for otherwise failing to avoid a conflict of interest.
Adoption of any other pre-insolvency measures
No additional pre-insolvency measures have been created in Australia as part of the Government’s specific response to COVID-19. However, the temporary insolvent trading safe harbour, along with the temporary measures concerning the statutory demand process and the repayment of loans and rental obligations (see further below), were designed to encourage informal workout attempts outside of a formal insolvency process.
Changes to the insolvency process
Enhanced moratoria and commencement conditions
Statutory demands and liquidation
The Omnibus Act increased the monetary threshold for a creditor to be able to issue a ‘statutory demand’ on a company for an unpaid debt from $2 000 to $20 000 and extended the time for a company to respond to a statutory demand from 21 days to six months. This measure originally applied between 25 March 2020 and 25 September 2020, before being extended until 31 December 2020.
This interim measure was significant because a company’s failure to respond to a statutory demand within the required timeframe gives rise to a presumption of insolvency and is the most common circumstance relied on by a creditor to commence a court application for a company to be wound up / liquidated on the basis it is insolvent.
The new money threshold and extension of the time limit contributed to a substantial reduction in court appointments of liquidators throughout 2020.
Enforceability of claims of financiers and commercial landlords
Extending support originally targeting SMEs, the peak body for Australia’s trading banks, the Australian Banking Association (ABA), announced on 30 March 2020 that its 22 member banks had voluntarily agreed to allow businesses with total business loans of up to $10 million to defer their loan repayments for up to six months. The ABA estimated that the support would extend to 98% of all businesses with a loan from an Australian bank and would cover up to $250 billion worth of loans.
Following the expiry of the initial deferral period on 30 September 2020, customers who could repay their loans resumed doing so, while those facing ongoing difficulties were offered loan variation or restructuring arrangements, with a last resort further deferral of up to four months available for customers facing particular hardship.
In November 2020, the ABA released data showing that, at the peak of the pandemic in June 2020, there had been 228,070 business loan deferrals, of which 198,262 were SME deferrals. However, by November 2020, business loan deferrals had fallen to 72,909, of which 65,599 were SME deferrals – a drop in each case of more than two thirds.
As noted in section 1 above, commercial landlords in each state and territory have been prevented from evicting tenants that have not paid their rent due to the financial impact of COVID-19 and have been required to negotiate rental waivers, reductions and deferrals with tenants. However, those measures have since expired in some states and territories. New South Wales, Victoria and Western Australia will continue to apply the relief measures until 28 March 2021.
The full Insol International infographic can be accessed here.