We are all ‘over COVID', but are we ‘all over' the business law issues likely to arise when COVID-19 is all over?
Our objective with Commercial Corner is to address some of the legal issues associated with the ‘business' component of running a ‘financial services business'. Almost all HN Hub subscribers hold an AFSL or ACL. Most of the HN Hub content, including T-REX, focuses on the law and regulatory issues relevant to the financial services or credit activities carried out under those licenses.
However, you are also running businesses and face the raft of legal obligations that apply to any business, irrespective of industry. You own or lease premises, employ staff or sub-contractors, have supply agreements, own intellectual property, have creditors and debtors and buy and sell businesses.
As we emerge from the worst of the COVID-19 lockdowns, and the extended business help measures provided by the Commonwealth, State and Territory governments expire, we expect to see several business law issues surface. This article highlights some of the issues we think will emerge, to assist our subscribers to ‘get ahead of the curve'.
The relief provided under the Commonwealth Cabinet's Mandatory Code of Conduct for SME Commercial Leases has been implemented differently in each State and Territory. The Code ended in WA, QLD and SA on 30th September 2020. It will come to an end, unless further extended:
- in NSW on 24 October 2020;
- in VIC on 31 December 2020;
- in the ACT and the NT when the State of Emergency is no longer in place or when the Minister declares; and
- in TAS on 27 March 2021 or when the Minister declares.
If you are/were eligible in your State or territory to access the benefits of the Code, it is likely that your lease will have been varied. Perhaps part of your rent was deferred, and the term of the lease extended. If the impact of COVID-19 to your business has been such that you will no longer be able to meet your rent commitments; be aware of principle 9 of the Code. That principle has been implemented in all States and Territories except Queensland, South Australia and the Northern Territory. Principle 9 requires the Landlord to negotiate repayment arrangements over an extended period so that your business is not faced with undue financial burden, and repayment should not commence until either the Pandemic ends or your existing lease expires; whichever is first. Under the Code, the Landlord (in most jurisdictions) is prevented from evicting you from the premises for non-payment of rent, terminating the lease or commencing proceedings against you. When the Code expires you will no longer have this protection.
If you still have an opportunity to access the Code to negotiate arrangements to accommodate your anticipated cash-flow, then we recommend that you do this before the Code expires.
If you have weathered the Pandemic well so far, but the Pandemic's economic fallout sees you struggling with your rent, it will be worth approaching your landlord to negotiate. The spirit of compromise and the principle of negotiating in good faith will be important in dealings in the post-COVID-19 environment. Helping a reliable tenant through a difficult time is likely to serve the interests of a Landlord better than having premises sitting vacant for a period or chancing the unknown.
If you are negotiating a new lease in the current environment think about:
- Rent review provisions – it is likely that the increase in working from home will reduce the demand of office space, and therefore rents. Consider rent reviews to market, rather than fixed rent reviews. Consider also whether to have rent reviews more frequently;
- Cleaning – what is a reasonable standard of cleaning and who is going to do what in relation to making the work environment COVID safe;
- Does the lease contain provisions around ‘core hours' and, if so, do these accommodate the likely staggering of hours during which employees will be returning to work to avoid overcrowding of public transport?
Despite the COVID-19 numbers being very low or non-existent in most states, many people are still working from home. I know this is true of staff in our own Melbourne office (not surprising) and Sydney office (more surprising). However, it is likely that over the coming months, staff will begin to return to work.
There are various legal duties that employers will need to consider. These include the duty to provide a safe workplace (at common law) and to comply with Workplace Health and Safety legislation. So, as staff return to the office consider things like:
- the duty to provide a safe workplace – the workplace will now include the working environment at home;
- hygiene, social distancing, mask wearing, etc. consistent with advice from the health authorities in your State;
- a rapid response plan if you have a case of COVID-19 in the office;
- monitoring numbers in lifts, meeting rooms, reception areas, the coffee room, the toilets etc. and how these rules will be monitored and enforced;
- how to communicate all of this to staff in a clear and timely way;
- will there be more people working from home on a full-time or part-time basis? What does this mean for your office arrangements?
- staggering starting and finishing times to moderate numbers on public transport. How flexible will you/can you be in relation to work location and hours?
- Revenue may not return to normal quickly. When JobKeeper ends, what does that mean for your workforce. Will there be redundancies?
- How will you deal with staff leave? Many employees have declined to take their leave during lockdown because they have been confined to barracks. Might there be a tsunami of leave taking just as things begin opening and demand for your services increases?
In working through these issues, businesses need to consider relevant Awards, the Fair Work Act and Commonwealth and State anti-discrimination legislation.
Debt Recovery and Insolvency
We expect to see a greater number of businesses either chasing, or being chased, for money. In either case, both debtor and creditor have a legitimate problem. The creditor has done the work, is legally and morally entitled to payment, and needs the money to pay its own debts. The debtor has a problem because it, usually, wants to pay but simply doesn't have the resources to do so.
There are legal processes available to obtain orders for payment of debts, and various mechanisms for the enforcement of those orders. These all cost money, which is already scarce. It follows that if parties can negotiate a way forward without incurring these costs, they are often both better off. Occasionally, court process is warranted.
The existing moratoriums on insolvency and bankruptcy enforcement have been extended to 31 December 2020. The first quarter of the next calendar year is likely to see a significant increase in bankruptcies and the service of creditors statutory demands. Although the moratoriums are intended to help businesses survive, to employ staff and get back to profitability post-COVID-19, they have also acted like anaesthetic, disguising the true pain businesses are feeling.
The Government has announced a U.S. styled Chapter 11 bankruptcy regime, designed to help companies with liabilities under $1 million to restructure their debts while remaining in control of their businesses. Although we have yet to see the details, the reforms are planned for 1 January 2021. This approach to insolvency will provide much greater flexibility for small businesses that find themselves in difficulty. A small business will have a 20-day period to establish a ‘Restructuring Plan' will a small business restructuring practitioner. In the meantime, the existing directors continue to conduct business as usual. That Restructure plan is voted on by creditors within a further period of up to 15 days. If passed, it will bind all unsecured creditors.
In preparation for the end of the moratoriums, we suggest that you consider:
- what the real underlying profitability of your business is once the various Commonwealth and State government assistance packages are gone;
- how robust your business is, considering a possible decline in economic activity post-COVID-19;
- what work you need to do between now and the end of the year to ensure your cashflow resources/liquidity are adequate (the test for insolvency is whether the business is able to meet its debts as and when they fall due – it is more about the cashflow than the balance sheet). Such work might include:
- beginning negotiations with your bank for greater working capital;
- getting on the front foot with creditors with whom you foresee issues; and/or
- doing an expenses audit – are there any areas that you can trim.
- Keep an eye out for details of the insolvency reforms. We will report on these in T-REX or on the HN Hub.
Privacy and Data
The likelihood is that post-COVD-19, more people will be working from home more often. Most of our readers are required to comply with the Australian Privacy Principles (APPs) set out in the Privacy Act 1988 (Cth) in relation to their collection, use and disclosure of personal information. Personal information is information or an opinion about an identified individual, or an individual who is reasonably identifiable, whether the information is true or not, and whether or not it is recorded in a material form. Typically, this information includes names, addresses, email addresses, phone numbers, birth dates, financial details, a person's signature, employment details etc. The Office of the Australian Information Commissioner (OAIC) has provided guidance and advice, which you can find here.
- Securing electronic devices and storing them in a safe location when not being used;
- Load updates to devices, virtual private networks (VPNs) and firewalls;
- Use work email accounts for all work-related emails containing personal information;
- Implement multi-factor authentication for remote access systems and resources;
- Only access trusted networks and cloud services;
- Keeping up to date with advice from the Australian Cyber Security Centre.
Supply and Other Agreements
Where performance of contractual obligations becomes impossible through no fault of either party, the law can sometimes intervene to provide relief. It may do this under the terms of the contract, where the contract contains a ‘force majeure' clause, or through the common law doctrine of ‘frustration'. This is where some event over which the parties had no control makes the contract impossible to perform. In the latter case, it is not so much a question of whether complying with the contract would cause hardship to the non-performing party, but whether the contract is now very different from anything the parties had in mind or could have foreseen.
Where parties have turned their minds when contracting to these matters and included these in a force majeure clause, it will be difficult to rely on frustration, and the question will be ‘what is the ambit of the force majeure clause'? Did it include Pandemics? If not, a party who is, because of COVID-19, unable to perform its obligations, may nevertheless be required to perform the contract or pay damages. If the force majeure clause is worded in a way that would include COVID-19, then typically the party would be relieved from having to comply with that obligation.
If you have providers who are unable to provide their good or services to you, or you find yourself unable to provide your good or services to others because of COVID-19, you may consider whether there is relief available to you under either of the above common law doctrines. The impact of frustration or a force majeure clause will differ depending on a range of matters, including, in the case of a force majeure clause, the wording of the clause, and in the case of frustration, the nature and timing of the obligation breached and the operation of any relevant States' Frustrated Contracts Acts.
If COVID-19 has made performance of your contractual obligations impossible, you will usually negotiate a better outcome by understanding your possible legal rights and/or those of the other party.
An Outbreak of Reasonableness?
It is to be hoped that in the next little while we will see an outbreak of the great Australian spirit of giving each other ‘a fair go'. Where the intent is genuine and COVID-19 has stymied that intent, it is to be hoped that we will each ‘cut each other a bit of slack'.
One of my colleagues reminded me of a quote from Churchill – “Never waste a good crisis”. We have learned from our forced social experiment. The future should be informed by those learnings.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.