Time to plan for a better outcome
As the COVID-19 pandemic took grip in March 2020, the Coronavirus Economic Response Package Omnibus Act (2020) was enacted, providing temporary relief for financially distressed businesses.
This provided directors with a temporary moratorium to avoid being personally liable for debts incurred by a company in circumstances where the director has failed to prevent the company from trading whilst insolvent. Initially due to end in September 2020, an extension was announced ensuring measures would remain in place until 31 December 2020. The extension of these temporary measures has relieved the pressure on directors but with time ticking, are directors using this time wisely to not fall foul post 2020? It is critical that directors diagnose problems, plan for the future and take action to survive after this crisis.
Temporary relief coming to an end
The temporary relief for directors from any personal liability for trading while insolvent, for debts incurred in the ordinary course of the company's business, is due to come to an end on 31 December 2020.
Directors and company management need to get ahead of the curve and start planning to consider their obligations to all stakeholders and preserve optionality now. The uncertain timing for the relaxation of COVID-19 restrictions throughout the country is having a material impact on the ability of all businesses to plan and the level of government support for the economy is making the 'post hibernation business structure' difficult to define due to the distortion of the true long term.
Where uncertainty exists, clarity can only be gained by preparing for, testing, and understanding the impact of a number of different scenarios and understanding the options in responding to an evolving landscape. Directors and management teams who do this will not only be best placed to manage through the next twelve months but will have a more stable and certain base to take advantage of opportunities that may present in the future. Irrespective of the size of the business, directors and their management teams need to start planning now, considering all options, as they search for the appropriate course to restructure, right size or implement a turnaround plan for their businesses.
Critical to that planning process is the need to have reliable and detailed financial information and this is likely to be at level beyond most businesses' regular monthly reporting processes. Once identified or considered, each scenario needs to be modelled to clearly understand the financial implications for the business and its stakeholders. This also includes consideration of any potential personal liability that directors may be exposed to for trading whilst insolvent once the temporary releif expires on 31 December 2020. All forms of restructuring or right sizing can only be executed with highly reliable financial data; absent quality data, understanding the options available is not possible.
Restructure plans will extend beyond 31 December 2020, so what should directors be doing now to protect themselves post 31 December 2020?
If the financial modelling suggests that your company is likely to be trading whilst insolvent on or after 1 January 2021, you should engage an experienced and appropriately qualified restructuring advisor who has the depth of experience and understanding of the necessary steps required to comply with safe harbour when the current temporary moratorium ends.
What is safe harbour?
The 'safe harbour' laws came into effect in September 2017, to provide directors, in certain circumstances, the time and scope to develop a strategy to provide a 'better outcome' for creditors than otherwise immediately available by placing the company into administration or liquidation.
What is the benefit of safe harbour protection for a director?
Implemented properly, safe harbour protects directors from
personal liability for insolvent trading. Personal liability arises
for directors of a company that incurred debts whilst insolvent and
those debts remain unpaid.
The 'safe harbour' provisions protect the directors from civil liability for insolvent trading.
When does the safe harbour protection start for a director?
The safe harbour protection applies from the time a director starts developing one or more courses of action, and one of those courses of action is reasonably likely to lead to a better outcome for the company than the immediate appointment of an administrator or liquidator. The clearest way a director can demonstrate commencement of developing such a course of action is through the engagement of a suitably experienced and qualified restructuring advisor.
However, not all companies will be eligible for safe harbour.
Who is eligible for safe harbour?
There are two parts to consider to formally access safe harbour protection:
- A company must satisfy the following criteria:
- Employee entitlements are to be paid up to date, including superannuation
- Taxation reporting obligations are to be up to date
- No outstanding issues relating to employee or officer misconduct
- Books and records must be up to date so that the directors are property informed of the company's financial position.
- The directors must:
- Develop a turnaround plan that is comprehensive with clear milestones and objectives; and
- Demonstrate the turnaround plan is likely to lead to a better outcome than the immediate appointment of an administrator or liquidator.
Now is the time
There is no doubt the COVID-19 pandemic has seen companies battle for survival. For those struggling, the extension of the safe harbour arrangement has undoubtedly given directors the time to take advice and, if appropriate, implement safe harbour plans in readiness for the rebound. For those who haven't yet started developing a course of action, the safe harbour temporary arrangements ends soon, so planning must start now to avoid trading whilst insolvent implications once the temporary relief ends on 31 December 2020. It takes time and preparation to enter safe harbour and the earlier the planning starts, the better the options available to the company and its stakeholders. The remaining time must be used wisely.
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.