This article was written by Samantha Kinsey, Louise England and Andrew Kennelly.
Insolvency relief extended to 31 December 2020
On Sunday, the Federal Government announced that it will extend until the end of the year insolvency relief measures which were put in place from March 2020 as part of its response to the COVID-19 pandemic which were due to expire on 25 September 2020.[1]
Under the proposed Regulations (not yet released), the following temporary regulatory changes will be extended until 31 December 2020, unless further extended:[2]
- Insolvent trading – Temporary relief for directors from any personal liability for trading while insolvent, for debts incurred in the ordinary course of the company's business.[3] The relief does not extend to relief from statutory or common law directors' duties; and
- Statutory demand regime – Temporary increase in the threshold at which creditors can issue a statutory demand from $2,000 to $20,000 and the time companies have to respond to statutory demands they receive from 21 days to six months.[4]
This announcement was hot on the heels of the Victorian Premier, Daniel Andrews', significant announcement on Sunday that 'Stage 4' lockdown in Metropolitan Melbourne will be extended until at least 28 September 2020 with business activity to be significantly curtailed until 23 November 2020 or until there are no new cases of COVID-19 through community transmission for 14 days across Victoria.[5]
Impact of insolvency relief measures
Described by Federal Treasurer Josh Frydenberg as a 'regulatory shield' to help viable businesses to survive as they adapt to a new COVID-safe economy, the extension of the insolvency relief measures have been designed to prevent a further wave of failures before businesses have had an opportunity to recover.[6]
To date, the insolvency relief measures (together with more than 80 temporary regulatory relief measures and stimulus initiatives such as JobKeeper and the National Cabinet Mandatory Code of Conduct for tenants) have been extremely effective at enabling businesses to go into hibernation during the various 'lockdowns' and restrictions imposed by State Governments in response to the COVID-19 health crisis. The number of companies entering insolvency during the pandemic is 51% down compared with the same time in 2019, with the number of voluntary administration appointments down 55%.[7]
Renewal after the hibernation
While the extension to insolvency relief provides stability during the challenging times caused by Victoria's 'second wave', the insolvency relief measures are not encouraging business renewal that the economy needs (especially in Victoria) to bounce back and attract new capital post lockdown.
The voluntary administration process introduced in 1993 was designed in the wake of the last recession to facilitate such renewal.[8] Voluntary administration is a flexible tool to facilitate the restructure and survival of an insolvent business. The sale of Virgin Australia to Bain Capital through an administration process and deeds of company arrangement which were approved by creditors on Friday, 4 September 2020 ought to ensure the survival of the Virgin business, save thousands of jobs and benefit the travelling public of Australia generally. This is the kind of renewal that the voluntary administration process was designed to achieve.
However, a successful administration process needs to be funded. With a 55% decrease in the number of voluntary administration appointments, many companies may be delaying the inevitable and losing valuable time (and the necessary cash reserves) to seek an outcome that is better for its stakeholders than a liquidation. The Turnaround Management Association commented in June 2020 that working capital pressure is mounting across the economy, with less than 50% of businesses holding more than 6 months' cash.[9] There is a danger that the extension of the insolvency relief will continue to encourage this delay.
As the Federal Government has rightly recognised, as the economy starts to recover, it will be critical that distressed businesses have the necessary flexibility to restructure or to wind down their operations in an orderly manner.[10] When the Federal Government relief measures and stimulus cease, the full economic impact of COVID-19 will be felt by businesses. An unprecedented demand for insolvency processes is expected to follow. Further, insolvency law reform may be required to respond to this increased demand. However, any such reform should be balanced with protecting creditors' enforcement rights to avoid undermining the attractiveness of Australia for investors and creditors.
Implications and the impetus to reform?
As things stand, the restructuring processes available to us are still limited to negotiation, schemes of arrangement (which are only fit for purpose in large cases) and voluntary administration. Like other jurisdictions, we should be using the hard work and expensive hiatus to implement insolvency law reform to expand our available procedures and restructuring options to deal with the wave of bad debt. We encourage the Federal Government to look at introducing new options which appropriately balance the interests of companies and their creditors. The United Kingdom has shown us the way, with the introduction of a comprehensive set of restructuring options (including a short-term moratorium and a restructuring plan process) that will serve them well moving forwards.[11]
As Australia, and Melbourne in particular, begins its economic recovery[12], the insolvency law plays a critical role in encouraging investment and the necessary redistribution of capital to support this renewal.
[1] Joint Media Release from The Honourable Josh Frydenberg MP and The Honourable Christian Porter MP, 'Extension of Temporary Relief for Financially Distressed Businesses' 7 September 2020. See, https://joshfrydenberg.com.au/latest-news/extension-of-temporary-relief-for-financially-distressed-businesses/.
[2] For further information about the temporary insolvency relief passed by the Federal Government on 23 March 2020 and other temporary relief provided to financially distressed businesses in response to the COVID-19 pandemic, see Covid-19 Second Stimulus Package announced: Government initiatives for potentially financially distress businesses and Out of the 'Safe Harbour' and into the 'Dry Dock'.
[3] Coronavirus Economic Response Package Omnibus Act 2020 (Cth), Schedule 12, Part 3.
[4] Coronavirus Economic Response Package Omnibus Act 2020 (Cth), Schedule 12, Part 2.
[5] Described under the Victorian Government's roadmap as the 'Last Step'. See, https://www.vic.gov.au/coronavirus-covid-19-restrictions-roadmap-metro-melbourne.
[6] Joint Media Release from The Honourable Josh Frydenberg MP and The Honourable Christian Porter MP, 'Extension of Temporary Relief for Financially Distressed Businesses' 7 September 2020.
[7] Comparing ASIC monthly provisional data as at July 2020, compared with the month of July 2019. See, https://asic.gov.au/regulatory-resources/find-a-document/statistics/insolvency-statistics/insolvency-statistics-series-1b-notification-of-companies-entering-external-administration-weekly-update/.
[8] Prior to the voluntary administration process, the only formal process for the compromise of a company's debts was by way of a creditors' scheme of arrangement.
[9] https://turnaround.org.au/wp-content/uploads/2020/07/TMA-webinar-CRO-and-interim-turnaround-roles-200701.pdf.
[10] Joint Media Release from The Honourable Josh Frydenberg MP and The Honourable Christian Porter MP, 'Extension of Temporary Relief for Financially Distressed Businesses' 7 September 2020.
[11] See, Corporate Insolvency and Governance Act 2020 (UK) which entered into force on 26 June 2020. This Act introduced various measures, including a free-standing moratorium and a new restructuring plan process, which was used in the restructure of Virgin Atlantic Airways. The United Kingdom already had the company voluntary arrangement process set out in Part I of the Insolvency Act 1986 (UK), which is likened to the United States Chapter 11 "debtor in possession" process.
[12] See, Melbourne's Economic Recovery: 9 ideas for the way forward.
