Where to from here?

At the end of September 2020, temporary relief for financially distressed businesses (directors’ personal liability for insolvent trading, increase in the threshold at which creditors can issue a statutory demand and the time companies have to respond to a statutory demand) expire at the same time as Government assistance is phased down. Owners and directors of businesses facing viability challenges need to ponder and plan potential options to help them navigate a pathway to recovery.

What are the options?

Safe harbour provides directors with protection from insolvent trading liability when they are developing a course(s) of action which is ‘reasonably likely’ to lead to a ‘better outcome’ for the company (such as restructuring, sale, recapitalization or cost cutting opportunities) than administration or liquidation.

The safe harbour provisions allow directors with the opportunity to restructure businesses without triggering a formal insolvency process, thus delivering a shield from insolvent trading debts in the event the restructure falls short.

The conditions for accessing safe harbour include:

1. the debt must be incurred directly or indirectly in connection with the proposed course of action.
2. the company must continue to pay all employees’ entitlements (including superannuation) as and when they fall due.
3. the company must continue to comply with all tax obligations.

In addition, the safe harbour protections do not prevent the appointment of an insolvency practitioner (administrator, liquidator or receiver) by a third party during the safe harbour period.

Voluntary Administration (VA) process strives to maximize the chances of the company’s business surviving or if that is not possible, to result in a better outcome for the company’s creditors than from a liquidation scenario.

This strategy generally starts with directors resolving that the company is insolvent or likely to become insolvent in the future, following which the company is placed into administration and an administrator is appointed.

The administrator takes over the company’s affairs in lieu of the directors with the authority to trade the business as a going concern. The objective is to deal with the affairs of the company in a manner that achieves a better outcome to creditors than if the company was placed into liquidation, with the opportunity to adopt tools like a Deed of Company Arrangement (DOCA) to achieve this aim.

DOCA is a binding agreement between a company and its creditors detailing how the company’s affairs will be administered. For example, if the company wants to offer a compromise to its creditors, a DOCA is a potent tool of binding all unsecured creditors to such an agreement. VA with a view of executing a DOCA can also be utilized to eliminate unprofitable contracts (leases) and settle legal disputes which would otherwise be litigated at significant costs.

The pandemic has witnessed the evolution of ‘Holding DOCAs’ – utilized to deliver a pause for companies amid the uncertainty of Covid-19. These DOCAs are used when it is not in the interests of creditors that the administration process ends, or a liquidation begins. Rather, a creditor standstill is recommended at the same time as numerous restructuring opportunities are explored. This strategy is especially alluring for businesses that, excluding the consequences of the pandemic, are viable.

How can Charles & Co. help you?

Charles & Co has helped numerous clients navigate challenging situations and distressed deals. We believe that acting early, followed by a well-crafted adaptable strategy is the key to increasing the prospects of forging a successful pathway to recovery.