As the economic impacts of COVID-19 crisis begin to take hold, we look at ways that business can turn around or restructure as an alternative to shutting down and at new changes to Australia’s tough insolvency laws which give directors more scope to ride out the storm and restructure.

    Small businesses employ around five million Australians, but as the outlook following COVID-19 grows more pessimistic, industry experts have welcomed a new special emergency government measure which suspends personal insolvent trading liability for directors for the next six months.

    Carl Gunther, President of the Turnaround Management Association of Australia (TMA), says the TMA is pleased to see government act decisively but that directors still need to observe their duties which require them to act in good faith and exercise a duty of care and diligence.

    The changes remove a roadblock, but businesses still need to restructure and employ turnaround techniques. Standstills, refinancing, cost outs and operating model redesigns etc will still be required. “It is the removal of a roadblock, it is not a panacea,” he told the AICD in an interview. “Good quality restructuring still needs to be done.”

    Last weekend, the Government announced that the Corporations Act 2001 will be amended to provide relief for companies to deal with unforeseen events that arise as a result of the Coronavirus.

    The AICD has also strongly welcomed the government's package of measures to support organisations through the COVID-19 crisis including extra support for small business and not-for-profits, and regulatory relief.

    AICD CEO and Managing Director, Angus Armour, said, “The AICD strongly welcomes these measures which will support organisations dealing with unprecedented disruption.” “The regulatory safety net includes the temporary removal of the personal liability that directors face if a company trades while insolvent. This will give boards and companies greater comfort in managing the impacts of COVID-19, without the pressure to move to formal insolvency or wind-up immediately.”

    “This is an important step for organisations facing a highly complex and evolving market.”

    The change in insolvency laws follows lobbying from corporates, the AICD, TMA and insolvency expert Mark Korda of Korda Mentha, who last week predicted a “tidal wave of business failures” if the laws were not changed. “We need to encourage turnaround and restructuring,” he wrote in the Australian Financial Review.

    So what is the best way for companies to navigate the new economic climate and consider a business turnaround in the face of lower revenue and loss of customers caused by COVID-19? In a question-answer interview with the AICD, Carl Gunther offers some tips below.

    How deep is the COVID-19 economic impact so far?

    Ultimately we are riding new ground here. I have been a restructuring professional for 30 years and if I look at the collapse in 1987, this is nothing like it. This is much bigger. The 1987 collapse was followed by the 1991 recession. To me this is a lot deeper and lot more severe. Notwithstanding social media and all the technology we have, we are designed and our commerce is reliant upon being in community with each other. COVID-19 has disconnected our community and this impacts people more broadly but it is also impacting commerce. I am getting inquiries every day seven days a week, some from new people who need help, in addition to people I am already helping.

    What is the impact on SMEs?

    It is a major disruption. I think SMEs are more impacted than the larger enterprises which have a much broader opportunity to access different forms of capital. The smaller end of town is going to be a lot more impacted. And that’s where you see government support going. You need to get directors to keep their businesses alive until we settle on a new normal. The government’s package is designed to get help to directors so they can help themselves and their organisations.

    What are the top three things firms should do if they are in distress?

    The first thing to do obviously is to look at the safety of your staff to make sure you have a plan in place as part of your response to the crisis. Secondly, be resolute about how you are going to respond and build out a team who can help facilitate and provide open and clear flows of information. The key thing there is to try and predict which way your business is going to go in this crisis under different scenarios, like whether revenue will drop by 50 or 75 per cent or to zero. Focus on liquidity and cashflow as the first priority. Next, identify your key stakeholders and keep them informed about your plans – your customers, lenders, suppliers and employees.

    What do the changes to insolvent trading laws mean for directors?

    It is the removal of a roadblock, it is not a panacea. Good quality restructuring still needs to be done. It does mean that directors in the maelstrom of what is going on now don’t have to look over their shoulders to ask “Am I trading while insolvent?”

    Directors and managers need to prepare short term cashflow forecasts and review them regularly by looking at risks as they evolve and then think about options as part of a plan. So that landscape has not changed. Most of the people I talk to are NEDS (non-executive directors) so from their perspective it is very important to look at it this way. And to focus on trying to preserve the business as a going concern for the next six months. They will have so many issues they are trying to deal with. If you have one less issue you can take off the table then it gives latitude.

    But it is still going to be tricky to navigate. Because now you have to have a really very good relationship with your suppliers. Legally before, if you were a director and you incurred that liability with a supplier, there is potential for you to be held liable if you traded whilst insolvent. Today with the new legislation there is effectively a suspension of that law. I can’t stress enough that this is going to be about your relationship with your suppliers and how you manage that credit position because it could have some material impact around credit and liquidity in the marketplace.

    Section 588G which is the duty not to trade while being insolvent is effectively suspended. It is a safe harbour for all for the next six months. But legislation has been passed only in respect of civil liability, not criminal. There are still director duties that do apply. If directors see that as an opportunity to phoenix a company and try to do the wrong thing to deliberately defraud creditors, the legislation would appear not to let those people off the hook.

    Should companies try to avoid staff layoffs for as long as possible?

    In any sort of circumstance, it is hard to get staff sometimes and hard to keep good staff. So the objective is to try and retain staff in whatever form you can. The ideal is to find a way to keep people employed, but in a reduced capacity.

    The clients I am talking to face in some cases a 100 per cent shutdown of revenue so there is no revenue coming in through their businesses. So how do you respond? You want to think about recalibrating your business so when the time comes you can think about bringing people back on to your workforce. If you can change hours and negotiate with employees changed hours, then reduce the level of hours, that is a good thing. And if you have to make employees redundant of course you have to trigger a liability which is cashflow.

    Which customers should you keep?

    A lot of companies will have A class customers, B class and C class. You should focus on your A class clients most if you need to shrink your business to survive. It may well be that you have to let go some of your other customers because there is just too much cost to support them.

    What are some positive ways firms are turning around?

    I have seen a lot of organisations move online. If they can move online and provide services or products that they otherwise would not have, being able to pivot like that will be key for many companies. I am on the board of a company where the business was trading face to face offering workshops and seminars and now we are shifting to online delivery. I am also involved in another learning business and that business is seeing opportunities in new areas which we are seeking to explore.

    If going broke is looking likely

    Temporary relief from creditors' demands against you plus temporary relief for your personal liability as a director while trading insolvent.

    The federal government has temporarily raised the threshold for creditors to issue a statutory demand on a company from $2,000 to $20,000, for six months.

    It has also increased the time allowed for a company to respond to statutory demands from 21 days to six months. This also applies for six months.

    For individuals, the threshold for initiating bankruptcy proceedings has increased from $5,000 to $20,000, and the time allowed for an individual to respond has increased from 21 days to six months. Again, this applies for six months.

    The government is also offering temporary relief for directors from personal liability for trading while insolvent, for six months.

    Info here.


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