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Carroll & O’Dea Lawyers’ COVID-19 Business Update: Extension of temporary relief for financially distressed businesses – resolving business debt disputes for creditors and debtors

Published on October 29, 2020 by Selwyn Black

Extension of temporary relief

On 7 September 2020, Federal Treasurer, Hon Josh Frydenberg MP announced the extension of temporary relief for financially distressed businesses, which:

1. Continued regulatory relief for businesses that have been impacted by the Coronavirus crisis by extending temporary insolvency and bankruptcy protections (which were due to conclude in September 2020) until 31 December 2020.
2. Extended the temporary increase in the threshold at which creditors can issue a statutory demand on a company (from $2,000 to $20,000.00), and for bankruptcy notices on an individual from ($5,000.00 to $20,000.00), and extended the time companies have to respond to statutory demands and bankruptcy notices they receive from 21 days to 6 months.
3. Extended the conditional temporary relief for directors for trading while insolvent.

Debtors – Breathing space

The Government initiatives provide some  breathing space to individuals and businesses for now, but delays the ticking credit crunch time bomb until the end of the year. At Carroll & O’Dea Lawyers we believe there are a number of important questions Debtors need to ask themselves now.

Have you considered your options for the coming year? Have you prepared a realistic cash flow projection to meet your business debts? What steps have you taken to obtain independent advice to restructure or negotiate with creditors now? Do you need help formulating a plan to address these issues before the deadline expires? What steps have you taken to assess your business now, its viability and do you know how to negotiate with creditors without prejudicing your position?

Creditors –  holding your breath

Holding your breath is hard, especially if you do not know how long you have to hold it for and when you probably have your own debt position to manage.

The extension of the temporary relief creates more pressure for creditors. If creditors are in default of their own financial or obligations, unpaid debts may incur continuing default interest, recovery costs or the suspension of services which may be vital to maintain business viability.

Again there are some important questions creditors need to ask themselves now. Do you have a systematic system for facilitating negotiations with debtors? Can you safeguard your assets? What steps have you taken to negotiate with your creditors without prejudicing your position?

What happens if you fail to take steps to resolve business debt issues?

Aged debt does not just have a domino effect for creditors- it creates a snowball effect that can have profound implications for businesses.

Creditors without a plan are putting their companies at risk by continuing to supply goods and services to “zombie” businesses with a high insolvency risk.

It is important to act now to slow the snowball effect including implementing checks and balances in relation to ongoing supplier arrangements including with regard to existing security, reviewing terms and conditions and preparing for the possibility that aged debt may not be satisfied. If your business cannot afford to lose out, it should consider if it should be continuing to supply goods or services to businesses that do not pay their bills within existing terms and conditions. After all, dealing with a debtor that is paying late or infrequently, bouncing cheques and in constant default are prima facie ASIC indicators of insolvency.

Creditors are often unaware that they may be liable to repay money received from an insolvent individual or company later to a trustee in bankruptcy or liquidator if the individual or company is sequestered or wound up. The cost in defending claw back proceedings can exceed the benefit received in the payment and add further to the snowball effect.

Some important questions to consider. If you are continuing to supply goods and services, what measures have you put into place to ensure that you are a secured creditor (and not an unsecured creditor), in the event of default or an insolvency event? What is your plan B? Can your business sustain the snowball effect from failing to obtain independent advice now?

What could you do to access credit or defer debt?

If you are holding your breath, and need oxygen – the Coronavirus Loan Guarantee Scheme and ASIC Guidelines to Retail Lenders are two options for a business to explore (with caution) that may create opportunities to enhance cashflow with government guaranteed loans of  $250,000.00 to $1million on now 5 year repayment terms.

Importantly, the Coronavirus Loan Guarantee Scheme may also be used for business purposes only, which may include seeking expert and independent legal advice on issues including  restructuring or resolving business disputes.

What steps should you take to resolve business disputes?

Seek independent advice regarding:

1. Your current aged debtors, debt recovery options and prospects.
2. Consolidate and reduce business to cash only operation, where possible.
3. Negotiations with suppliers for continuing supply, or an assessment of those secured or unsecured terms or the feasibility/benefit of any variations. Negotiation with parties regarding settlement agreements or for payment plans (parties should be extremely mindful how they are negotiated to avoid prejudicing their position).
4. Restructuring and turn-around opportunities. This can take the form of a debt equity swap arrangement, issuing further shares, or refinancing existing facilities either with established financial institutions or otherwise.
5. Insurance – directors’ and officers’ insurance and loss of business insurance policies, and disclosures to insurers to ensure cover should be reviewed.
6. Realistic cash flow projections, and a plan B for at risk accounts;
7. Understanding your asset protection structure and risks in the event of default and timing; and
8. Preparing a realistic strategy for creditors and debtors to continue business viability given the extension of temporary relief for financially distressed businesses.

How do I start?

Thinking about where to start is overwhelming, the key is preparation and understanding where you want to go.

If you would like to receive a costed proposal for advice, please contact Carroll & O’Dea Business Lawyers to discuss legal aspects of your business, debt or contract dispute.