Temporary changes to insolvency laws mean businesses have a safety net so they can resume normal operations once the crisis has passed. This includes an increase to the statutory demand limit (to $20,000), and extended protections for directors against personal liability for trading whilst insolvent. This safety net, however, is due to expire on 24 September 2020 and businesses can then expect sudden and aggressive debt recovery measures from creditors including the ATO. Please join our webinar with insolvency experts Robert Champney and Rebecca Forsyth who will discuss with you: Changes to occur from 25 September - statutory demands, bankruptcy notices, and obligations as a director; Debt recovery options available to your clients to improve cash flow; and “Red flags” that determine financial distress, what options are available to restructure, and the need for proactive conversations with your client and legal advisors

1. Financial distress and your
safety net during COVID-19
Robert Champney, Director
Rebecca Forsyth, Associate

2. PresentingWednesdays with RedchipWebinar
Robert Champney
Director
RobertC@redchip.com.au
Rob take a ‘hands-on’ approach to his
role as Director of Redchip’s Litigation
team, striving to identify the key issues
early in any dispute and to deliver
pragmatic, commercial advice to protect
and advance his client’s position.
Rebecca Forsyth
Associate
RebeccaF@redchip.com.au
Rebecca acts for clients in litigation and
commercial matters across a range of areas
including property and trust disputes, intellectual
property and employee theft, debt recovery,
lease disputes, director and company disputes,
fiduciary duties and general commercial disputes.

3. Amendments to the Corporations Act

4. Amendments to the Corporations Act
On 25 March 2020 the Federal Government amended the
Corporations Act 2001 (Cth) in response to the COVID-19
pandemic.
The purpose of the amendments to create a safety net for
businesses whilst they dealt with the sudden and
dramatic decline in revenue as a result of COVID-19, and
to prevent a wave of collapsing small and medium
businesses across the country.

5. Summary of amendments to Corporations Act
For companies
Increasing the threshold for a
statutory demand (to $20,000) and
extending the time for a debtor
company to comply with the
statutory demand (to 6 months).

6. Summary of amendments to Corporations Act
For directors
Protection from personal liability
for insolvent trading in relation
to debts incurred by the
company from 25 March to
24 September 2020.

7. Summary of amendments to Corporations Act
For individuals
Increasing the threshold for a bankruptcy
notice (to $20,000) and extending the time for
a person to comply with the bankruptcy notice
(to 6 months).

8. The amendments are due to expire on
24 September 2020
Dropping the safety net

9. From 25 September: Statutory demands
Creditors will be able to issue statutory demands for any debt
over $2,000.A debtor company will only have 21 days to:
• pay the amount demanded;
• negotiate a settlement with the creditor; or
• file an application inCourt to set aside the demand.
If the debtor company fails to do so within the 21 days, it risks
being wound up in insolvency and a liquidator appointed.

10. From 25 September: Directors’ liability for
insolvent trading
• Directors’ protection from personal liability for insolvent
trading will come to an end.
• For all companies who are continuing to trade after
25 September 2020 but are unable to pay their debts as and
when they fall due, the directors will be personally liable for
all debts incurred by the company.
• A claim for insolvent trading can be made by a liquidator
appointed to the company (for all unpaid debts), or by a
creditor.

11. From 25 September: Bankruptcy notices
Creditors will be able to issue bankruptcy notices for any judgment debt
over $5,000. A person will only have 21 days to:
• pay the amount demanded;
• negotiate a settlement; or
• file an application to Court to set aside the bankruptcy notice.
If the person fails to do so within the 21 days, they risk the creditor
making an application to Court for a sequestration order and the
appointment of a trustee in bankruptcy.
Importantly, a creditor must still obtain a judgment from a Court before
issuing a bankruptcy notice

12. What to expect?
Businesses can expect sudden and aggressive debt recovery measures from
creditors from 25 September 2020, including the ATO.
That might include:
• statutory demands being issued to companies for debts incurred in the last six
months, with winding up proceedings commenced if the company fails to
comply with the demand;
• creditors commencing proceedings against individuals for guaranteed debts,
and issuing bankruptcy notices once judgment is obtained; and
• once a company goes into liquidation, insolvent trading claims being brought
against directors personally.

13. Unfortunately, directors will,
over coming months, be faced
with the prospect of evaluating
whether their business has the
financial health to survive and
push through, or whether the
business cannot continue (at
least in its present form).
Early intervention

14. Early intervention cont.
Proactive conversations are often
be the difference between a
business that survives and a
business that fails (or between a
director being personally exposed).
Accountants are well placed to have
those hard conversations with their
clients, given their trusted role as
advisors and in-depth knowledge of
their clients’ businesses.

15. Red flags for companies

16. Red flags for companies
There are many signs that a business is struggling
financially or is insolvent. Some of the first red flags that
will be visible to accountants and advisors are:
• Being asked to negotiate payment arrangements (or
extensions of payment arrangements) with theATO,
banks, or other creditors.
• Existing funding arrangements being withdrawn or
restricted.
• Receiving creditors statutory demands or court
proceedings at the company’s registered office.

17. Red flags for companies cont.
• Directors receiving directors’ penalty
notices (DPNs) from the ATO or demands
under personal guarantees.
• Disorganised or incomplete books and
records, or a delay in having financial
statements prepared.
• Breaching payment plans.
• Significant aged debtors – it becomes
increasingly difficult to recover debts over
60 days.

18. Red flags for directors

19. Red flags for directors
Some directors may be particularly
vulnerable, such as where:
• they are personally liable for the
company’s debts, because:
o they have given personal
guarantees, such as a lease;
o the company has outstanding
tax or superannuation liabilities;
or
o the company may be trading
while insolvent.

20. • They hold a QBCC licence or
other professional registration
that is affected by bankruptcy
or liquidation of their company;
• They own significant assets in
their own name; or
• They have had previous
companies go into liquidation.
Red flags for directors cont.

21. Restructuring or external administration?

22. Restructuring or external administration
Where a company is unable to continue
trading profitably or has seen business debts
accrue to an unmanageable level during a
period of downturn such as during the
COVID-19 pandemic, restructuring or
external administration can offer a way out.
Options include……..

23. Voluntary Administration and a Deed of Company
Arrangement (DOCA)
Pros:
• If the DOCA is approved, the directors can
continue to run the company with a clear
plan for settling the debts of creditors.
• The terms of the DOCA can be flexibly
crafted to suit the business and its
creditors.
• Can be a better outcome for creditors,
shareholders and directors than a
liquidation.

24. Voluntary Administration and a Deed of Company
Arrangement (DOCA)
Cons:
• The administrators will incur fees which need to be paid in priority to
creditors or other parties.
• Voluntary administration or the entry into a DOCA may be the
trigger for creditors to enforce personal guarantees, for financiers or
investors to withdraw or restrict funding.
• It can damage creditor relationships which are needed to trade the
company into the future.

25. Business Sale (Legal Phoenix transactions)
Pros:
• If done correctly, the
business can be salvaged
and legally sold to a new
entity who can continue to
run it free of the old
company’s debt.

26. Cons:
• The assets and goodwill of the
business must be properly
valued.
• The new entity must pay fair
market value in the transaction.
• The directors may still face
personal liability for claims by the
ATO or creditors of the old
company.
Business Sale (Legal Phoenix transactions)

27. Liquidation
Pros:
• If done early, directors can avoid, or
reduce, personal liability for the company’s
outstanding taxation, superannuation or
trading debts.
Cons:
• The possible loss of the business and its
assets.
• Liquidation of the company can be the
trigger for creditors to enforce personal
guarantees against directors.

28. Restructuring or external administration
There is no one-size-fits-all solution, and
it is important that directors are given
upfront and practical advice about the
risks and benefits of any proposed
restructure or external administration.
Clients should be particularly wary of any
proposal that sounds too good to be
true.With the rise of pre-insolvency
“advisors”, we have seen directors face
significant personal liability and
penalties because of being poorly
advised.

29. Settlement negotiations

30. Settlement negotiations
Negotiated settlements with
creditors can be a viable alternative
to external administration. However
it is important that these
negotiations are undertaken
sensitively, and with a clear
understanding of the likely
outcomes in liquidation or voluntary
administration as an alternative.

31. Settlement negotiations cont.
In the current climate, creditors may pursue
debt recovery actions more aggressively
than normal (or be less likely to agree to
deferred payment arrangements), especially
if:
• they are themselves experiencing
financial hardship or cashflow shortages;
or
• they have been waiting since March to
recover monies owed to them.

32. Settlement negotiations cont.
This makes it more important for clients to
negotiate proactively with their creditors.
Ideally this occurs before a statutory demand
or claim is issued.At the very least, it should
occur as soon as possible to avoid being
backed into a corner.
If your client is negotiating with multiple
creditors, that is a red flag for you to consider
their more general financial health.

33. Insolvent trading claims

34. Insolvent trading claims
• Directors can also expect liquidators to
pursue insolvent trading claims
aggressively, if companies do go into
liquidation, as a means to recover funds in
the liquidation.
• Defences to a claim for insolvent trading
can be difficult to run, particularly where
there were signs that the company was
struggling financially that should have been
apparent to the director.

35. Insolvent trading claims cont.
• Liquidators will rarely commence
proceedings without warning. Often
the key factor in resolving an
insolvent trading claim commercially
is getting good advice as soon as a
demand is received, and before the
liquidator has a chance to commence
proceedings.This will often result in
a better commercial outcome for the
director.

36. Options for debt recovery

37. Options for debt recovery
While the amendments have been a
welcome relief for many businesses
and business owners, they have also
caused cashflow difficulties and
financial hardship for others who
have been unable to rely on
statutory demands and bankruptcy
notices to recover monies owed to
them.

38. Options for debt recovery cont.
Many creditors have been waiting for these amendments to end so that
they can take steps to recover from their debtors. Options include:
• Statutory demands – Often the focus is on fast, cost-effective debt
recovery and statutory demands are ideal where there is no genuine
dispute that the money is owed.
• Enforcing security interests over secured assets.
• Court proceedings.
• Monies owed for building work - there are a range of additional
options including adjudication, subcontractors’ charges and
complaints to the QBCC.

39. Your questions are important
Please send them through using the
Q&A section 07 3223 6100

40. Thank you for tuning in