Coronavirus Alert: Managing interrupted cashflow & insolvency in a battered market

A series of devastating and unforeseeable blows has impacted the Australian market. On their own, any one of the bushfires, Coronavirus or extended drought would have been a significant event to manage, but to be struck by all three in a matter of months exacerbates the stress across business communities.

There is now a sense that the first recession since 1991 – the recession that we had to have – is looming. For many of us, this will be the first recession we have experienced at the coalface as business owners.

The construction industry is often a good barometer for challenging economic times. ASIC figures show in 2018 – 2019 there were 1,515 construction sector companies go into external administration, an increase from 1,354 in the previous year. Queensland also saw a slight increase to 280 companies from 262 in the previous year. This means the construction sector continues to account for more than 20% of all corporate insolvencies year on year.

In our experience, clients who recognise early signs of trouble are best positioned to navigate away from insolvency risk using restructuring and turnaround strategies to survive a downturn.

Recognising when to get help:

1. Are you being paid by your on customers or clients according to your terms?
2. Can you pay your bills?
3. Are your wages and superannuation payments up to date?
4. Are your lodgements and payments up to date with the ATO?
5. Are you able to access affordable short-term finance?

If you answered “no” to any of these questions, we recommend you talk to us about navigating your way through the coming months and to understand what a downturn might mean for you.

At a high-level, insolvency for a company or an individual occurs when you can no longer pay your debts as and when they fall due, but every circumstance is different.

Insolvent Trading

If you are a director of a company, it is most important you understand insolvent trading and its implications, so you don’t end up exposed to personal liability and jeopardising your personal assets.

Section 588G of the Corporations Act creates a duty to avoid insolvent trading – you must ensure the company does not trade or incur further debts while insolvent, or incur a debt that would lead the company into insolvency. You otherwise risk personally liability for those debts.

One of the measures announced by the Federal Government to enable businesses to trade through the impact of COVID-19 is a six month exemption from personal liability for trading while insolvent. This temporary relief applies to debts incurred in the ordinary course of the company’s business and the debts will remain payable by the company.

Directors must still act in the best interests of the company and any engagement in fraud or dishonesty by directors during this period could result in criminal penalties.

Further information about the government’s measures are available here.

Options to consider

Personal bankruptcy – You can become a bankrupt by your own volition or by a creditor’s petition. The prescribed standard period remains 3 years (although there is ongoing discussion whether to reduce this to only 1 year) and, upon discharge from bankruptcy, you will be released from most debts. However, there are significant implications to bankruptcy which should all be understood, including your ability to source future credit and your ability to work in certain professions.

There are alternatives to avoid bankruptcy such as entering into a Debt Agreement or a Part X Arrangement with your creditors. Different rules apply to these processes but, upon satisfying them, you could be released from your debts within a much shorter period than bankruptcy.

Voluntary Administration is used to appoint a qualified independent person to take control of a company and determine whether it can be saved. The administrator’s priorities are to salvage or restructure the company for trading on, to realise the company’s assets in an orderly way and to maximise the return to creditors. In an appropriate case, the director or other stakeholder may continue operations by proposing a ‘DOCA’ (Deed of Company Arrangement), designed to achieve a better outcome for creditors and avoid the need for a liquidator.

Liquidation is simply winding up the affairs of an insolvent company (that cannot be saved) in an orderly way for the benefit of creditors and according to the rules in the Corporations Act. Shareholders, creditors or the court can place a company into liquidation, after which the company is ordinarily deregistered. Liquidation, in particular, has serious implications for a director jeopardising building licences and triggering personal liabilities to some creditors, the QBCC and the ATO.

Receivership is usually prompted by a secured creditor or, in certain circumstances, the court, so that a qualified person can take control of assets for protection, or for the benefit of their appointor (usually the bank).

Restructuring usually involves rationalising a company to bolster for an economic downturn. It can enable directors to simplify a business to meet changing demand and market conditions. Companies that pre-empt changes and restructure early are often those that survive market downturns and we are already seeing airlines, hotels and other businesses in the tourism and hospitality industries restructure and adapt to the recent changes in economic conditions. Restructuring can also cushion your business against third parties’ insolvencies and disruption to your own supply chain.

Safe harbour is relatively new to Australian law and is based on the USA’s Chapter 11 regime.

It is designed to help a company trade through financial difficulties (without having to appoint an Administrator or other independent person) where its fundamentals are viable, or a restructuring might ultimately be possible. Safe harbour provides protections for a director, but there are strict qualification criteria. In broad terms, a director must demonstrate good management (including compliance with ATO lodgement rules) and have one or more credible plans that are likely to lead to a better result for the company, compared to appointing an Administrator or Liquidator, as soon as she suspects the company is or may become insolvent.

About us

Construction

With experience in both front and back end building and construction projects, and the issues affecting stakeholders in these matters, Thynne + Macartney’s Construction team helps clients deliver projects across the commercial, industrial and mining, retail, aged care, education and residential sectors.

Thynne + Macartney acts for principals, owners and body corporates, developers, contractors and consultants at every stage of project delivery, including pre-project structuring and asset protection advice, project procurement strategies, construction and consultant contracts, certification and security advice, debt recovery, dispute resolution and litigation arising from defective work claims, payment claims and certification or time disputes.

When things go wrong, our highly experienced team focuses on time-effective advice and dispute determination in Australian Courts and Tribunals, by domestic and international arbitration, and by statutory debt recovery and adjudication regimes under BIFA (formerly BCIPA and the Subcontractor’s Charges Act).

We advise on regulatory compliance, including for domestic building work, licensing requirements and offences under the QBCC Act. Our team has helped clients in the service industry undertake action under security of payment legislation and we have experience responding for builders where claims are brought against them.

Thynne + Macartney

We’re with you.

Insolvency + Restructuring

Focusing on solutions to cashflow concerns and short-term business operations, Thynne + Macartney’s team of insolvency + restructuring specialists are focused on the effects of insolvency and bankruptcy on companies and individuals.

By providing front-end business structuring and asset protection advice, our team has worked with business owners across Queensland to help them find solutions and options to deal with cashflow issues, including formal and informal arrangements with creditors, and, when needed, bankruptcy and insolvency.

Working with you to develop strategies for your situation, we offer direct partner access and experienced teams to deliver services at the most appropriate level of experience and rates having regard to the complexity of individual matters and client objectives. As a Queensland headquartered firm, we are working in the same market as our clients and set our rates based on local market conditions, offering a compelling alternative to top-tier and national firms.

Our clients include builders + subcontractors in contract advice, prosecuting + defending contract + statutory debt claims, shareholders in public + private companies in restructuring advice, directors of public + private companies defending insolvent transaction claims, creditors of public + private companies in debt recovery, statutory demands, enforcement of judgments + defending insolvency actions, and banks + insolvency appointees, including Receivers + Managers, Administrators + Liquidators on all aspects of advice, debt recovery + insolvent transaction enforcement, enforcing/ challenging securities including PPSA.

Thynne + Macartney

We’re with you.