Coronavirus: Insolvency relief hailed by industry

Insolvency practitioners have welcomed the move to give directors temporarily relief from trading while insolvent.

The government’s announcement adds up to temporary relief.

Insolvency practitioners have welcomed the federal government’s move to provide directors with temporarily relief from trading while insolvent and companies breathing space from being wound up by their creditors in the face of the coronavirus crisis.

But they have warned that people running companies that may be unviable should not use the new laws to dig themselves into a deeper long-term financial hole.

They also warn that the six-month relief for companies being wound up by creditors for debts of up to $20,000 could prompt a rethink by suppliers afraid to provide more goods in future or insisting on cash on demand, fearing that they may not be paid for at least six months.

The unprecedented measures involve changes to the Corporations Law to provide directors who fear their companies may be about trade while insolvent with six months of protection.

They also involve giving companies six months’ protection from being wound up by their creditors for debts of up to $20,000.

This represents a radical change from the current law where directors can be personally liable if the company they are running trades while insolvent and creditors with outstanding claims of up to $2000 can apply to wind up a company within a 21-day framework.

“The measures being introduced are about trying to give some breathing room for good businesses over the next six months,” David Walter, a partner in the restructuring and insolvency team at Baker McKenzie, told the Australian on Sunday.

He said the measures involved “massively relaxing” the current laws on trading while insolvent for directors.

“Until now if a director allows a company to trade while insolvent, they might incur personal liability.

“It is a big risk which plays on a lot of directors’ minds.

“That is now going to be completely relaxed (for six months).”

Mr Walter said the proposed new laws would not excuse companies from having to repay their debts in the future.

But he said they would allow “good businesses which have been hammered” a chance to get through the current financial crisis.

“Nothing is gained by pushing those businesses into insolvency,” he said.

Mr Walter used the example of a successful hotel that had a good business in normal times but could have been forced into insolvency by the proposed lockdowns if there were no change in the laws.

“These changes will help directors keep the company afloat if it is a productive company,” he said.

But he said those directors involved in trading dishonestly or fraudulently would still be subject to criminal penalties.

Mr Walter said the six-month relief period for companies from being wound up for debts of $20,000 or less would also give companies more breathing space to get through the current crisis.

“At the moment they are on a pretty tight fuse,” he said.

“Creditors of $2000 or less can demand repayment within three weeks,” he said.

If the company did not pay by this time, it could be subject to a winding up order.

“This is going to allow businesses to incur more credit and give them more time to repay it,” he said.

“What it does, in a very real way, is to give businesses some more liquidity in the coming months through this very difficult period, which is what they are going to need.”

He said the proposals would provide some relief for businesses whose cash flow “has gone up in smoke”.

But he warned that the moves would also have a downside for creditors of those companies, which now face the prospect of not being repaid for six months.

Mr Walter said now was a time that companies and their creditors needed to work together “to be realistic about what people can afford to pay and how long they need to pay”.

“Things are going to have to be pretty loose in business over the next six months or everyone is going to go bust,” he said.

He said the measures were “very positive” but were only a small part of a package of measures needed to support business through the crisis.

“We welcome the federal government’s announcement in relation to temporary relief for financially distressed businesses,” Sal Algeri, national lead at Deloitte Restructuring Services, said on Sunday.

“We believe it will provide business owners and directors with additional confidence to navigate the current uncertainty from trading in a COVID-19 environment.”

But he said the measures should not stop company directors from being vigilant and exercising care “to navigate the current market volatility”.

He said while the changes provided companies and directors with a six-month breathing space, they would need to ensure that their businesses were viable in the longer term.

He warned that they should not use the relaxed rules to incur debt that would be difficult to repay once the current relief measures expired.

“We do not want to see businesses that were financially unstable before the impacts of COVID-19 were felt without any checks and balances in place.”