Australia's business judgment rule was adopted two decades ago to protect directors who undertake reasonable and informed commercial decision-making from breach of directors' duties claims, however it has found limited use. This may be because the form it takes renders it less effective than comparable rules in peer countries, write Rachel Nicolson, Andrew Wilcock and Madeline White of Allens.
The return to long lockdowns again in 2021 was the last thing most businesses wanted to see after the chaos, disruption and challenges posed by the outbreak of COVID-19 in 2020. And for most, this second time round is proving to be significantly different and harsher from the first round of long lockdowns in Sydney and Melbourne last year, according to Gunther.
“The challenge if you were suffering in COVID One - and you're still suffering in COVID Two – is that chances are you have already trimmed a lot of the fat from your business,” he told the AICD in an interview. “And so the difficulty you're going to have is that there's not much room to move.”
A return to fundamentals is what is needed, he says.
“Changing strategy takes more time during a crisis, changing tactics is less difficult. So, I often focus directors’ attention on a tactical response to the immediate crisis before making wholesale changes to strategy. You have to view your business across your short-term and long-term cash runway (including government assistance). You have to maintain very transparent relationships with key stakeholders and your number one stakeholders.” These could be staff, clients, suppliers, landlords or lenders.
“You have to be really clear about not over-promising and keeping it really simple. And you may need to seek advice from a competent restructuring professional.”
However, on the other hand, the promise of recovery through vaccinations and the government’s four-phase national plan to economic recovery also makes the situation more positive this year, adds Gunther. “The mindset is very different this year for some directors in the sense that there is a path out of this. So just being able to survive with a constant focus on your cashflow is key.”
Focus on the horizon
Boards should re-examine and test plans and scenarios on a weekly, fortnightly and monthly basis and ensure that their assumptions still apply, especially in terms of the federal government’s runway to phase one and phase two of the government’s four-stage recovery plan.
“So now there is a timeline that people can work towards, I think being very focused around what your timeline and horizon is and the decisions you make will be really, really important.”
In particular, workplace vaccinations for staff are not mandated by the government, so for certain industries and some sectors, getting all staff vaccinated will be very important, he adds. The Fair Work Ombudsman recently issued updated guidance on workplace vaccinations which sets out how employers can issue directives to staff to be vaccinated if the direction is lawful and reasonable.
In terms of overall business survival and turnaround, the TMA is seeing many directors employ “do-it-yourself turnaround”, where they manage the process with stakeholders such as landlords and lenders. “So I think that status quo will continue whilst there remains a supportive stakeholder environment and provided government assistance is available to facilitate this.”
Many professional advisors in the SME environment, as well as in larger corporates have seen situations where directors have taken it upon themselves to manage their key stakeholders. “But sometimes when certain stakeholders are not as supportive, that's when an advisor might be called into support as part of that process.”
In one example, a business client of Gunther’s needed to secure ongoing support and funding from a lender, which took an equity stake in the business which allowed the lender to play a role in running the business.
Recent reforms to laws on continuous disclosure are so far untested but should also assist directors of distressed firms, many of whom say that these obligations are top of their concerns.
“Often at the very top of considerations, particularly in fields of distress, continuous disclosure obligations do keep them up at night and more so than perhaps even the insolvent trading obligations,” says Gunther. “The reason is that you can find yourself significantly more exposed through the continuous disclosure obligations relative to the implications from insolvent trading.”
Five response steps to the crisis
- Map out needs for cashflow over short-term and long-term horizons and adjust operations and staffing accordingly
- Before borrowing money or seeking equity, focus on revenue and margin improvement by cutting costs and improving efficiency
- Manage working capital by seeking help and support from the government and stakeholders such as staff, clients, suppliers, landlords and lenders.
- Boards should map out and re-examine plans and scenarios on a weekly, fortnightly and monthly basis
- Seek advice from professionals if the business experiences distress
“Make sure that you've got enough capital to survive the lockdown, and enough capital to build for growth once the path is clear,” says Gunther. However, if any business reaches a point where they are unable to pay debts when they are due and this remains a permanent state of affairs, that is when it is time to seek advice and consider the appointment of an administrator or liquidator.
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