In March 2020, the Coronavirus Economic Response Package Omnibus Act 2020 (Cth) (Omnibus Act) came into force. The Omnibus Act introduced a suite of temporary measures designed to help the Australian economy meet the head winds of the COVID 19 pandemic.
Many of the measures introduced through the Omnibus Act and the related regulations have now been withdrawn or curtailed. Notably:
- the temporary moratorium against insolvent trading claims under s 588GAAA of the Corporations Act has not been extended beyond 31 December 2020, although this continues to have limited application where a company is engaged in a restructuring under Part 5.3B of the Corporations Act;
- the time for compliance with statutory demands and bankruptcy notices issued on or after 1 January 2021 has reverted from 6 months to 21 days;
- the minimum debt for which a statutory demand (to companies) may be issued has reverted from $20,000 to $2,000;
- the minimum debt for which bankruptcy notices may be issued is now $10,000 down from the $20,000 threshold which operated between March 2020 and 1 January 2021.
Whilst 31 January 2021 marks the date for the withdrawal or curtailment of many of the temporary measures and thus a partial return to a pre-COVID legislative/regulatory landscape, it is also the date on which the new small business restructuring and simplified liquidation regimes came into effect.
The temporary measures and the JobKeeper payment have operated to protect Australian business from COVID’s full force and effect. With the winddown of those measures and the JobKeeper payment in March 2021, business is likely to come under significant pressure.
Looking back – what has happened so far
There was much speculation that business would fall off a cliff when the moratorium under s 588GAAA ceased on 31 December 2020. Some in the insolvency industry (including the lead insolvency practitioners body) contended that s 588GAAA required the appointment of an external administrator prior to 31 December 2020 in order to engage the protections under that provision.
With approximately 26 published notices of appointment of administrators between November and December 2020, the publicly available data does not suggest an unusual increase in appointments in anticipation of 31 December 2020. Whilst acknowledging the limits of a linear approach, the data does not reveal any rush to appoint prior to 31 December 2020 and insolvency practitioners are not complaining of an abundance of appointments.
There is nothing to suggest that the new business restructuring arrangements or the simplified insolvency regime have encouraged directors to rush to appoint external administrators. As at writing, some 13 declarations for eligibility for temporary restructuring and one notice of appointment of restructuring practitioner under the new Part 5.3B provision have been published by ASIC. Given there are approximately 2.3 million trading companies in Australia, the numbers do not demonstrate a significant downturn in the Australian economy.
Looking forward – what is going to happen
At the beginning of the pandemic, many were speculating a significant downturn, even a crash, in the economy. Some within the insolvency industry were predicting a flood of appointments on a scale not seen since the global financial crises or before. This has not occurred. Whilst the legal and regulatory framework applying to business changed in late 2020 and early 2021, the effect of the government’s economic and fiscal measures appear to continue to be working their way through the economy.
Although at a reduced rate, JobKeeper continues in place until March 2021, interest rates have remained at all time lows and asset prices (including real property) mostly continue to increase.
Past performance is rarely an accurate indicator of future performance. However, with the reintroduction of pre-COVID debt recovery measures (statutory demands and bankruptcy notices) and the withdrawal of JobKeeper, business is now moving from its safe port back to sea. This will likely see companies and businesses facing increased pressure from many sides.
How companies and their directors have conducted their affairs over the almost 12 months since March 2020 and the steps they take between now and March 2021 will likely be critical to how they fare over the next 12 months.
A watch and act warning
The well publicised drop in appointment of external administrators during the 6 months from March 2020, the seemingly few appointments in the lead up to December 2020 and the apparently slow take up of the small business restructuring arrangements might be construed as indicating that business is doing better than expected. Equally it may be demonstrative of the continuing effect of the temporary measures and JobKeeper.
If it is the latter, then businesses and directors must now act to protect themselves and their companies. How directors and their companies have behaved over the last twelve months and how they behave prior to March 2021 are likely to be determinative of their fate over the next twelve months. Before March 2021, Directors should:
- review their company’s solvency position and determine whether not they are eligible to engage in the small business restructuring regime;
- consider the benefits of engaging in a small business restructuring, particularly the extended operation of the s 588GAAA moratorium to companies undergoing a restructure;
- undertake a thorough review of their financial dealings over the past 12 months including payment and treatment of director loans and payment of any dividends;
- ensure that their employee entitlements and tax lodgements are up to date so to assist in ensuring eligibility for safe harbour under s 588GA and the small business restructuring regime;
- ensure that their financial records are up to date and continue to be maintained in accordance with the Corporations Act;
- consider restructuring their business, whether under the provisions of Part 5.3B or otherwise, to reflect the reality of their new operating environment.
The government's preparedness to extend deadlines for the operation of the temporary protections and JobKeeper throughout 2020 and into 2021 and the debate over the need to appoint an external administrators under s 588GAAA may well have lead many directors and companies into complacency.
However, all the key indicators from the Commonwealth government are that any further relief for business from COVID-19 is unlikely and will, at best, be targeted to specific industries within the economy. Directors and their companies should assume that March 2021 is D-Day for ensuring their affairs are in order. It is time for directors to cease watching and to start acting.
