Insolvency Reform Edition 21 | Is it time for radical restructuring reform?

Restructuring Insights

The reckoning - A Black Swan event in the form of a pandemic will test the capacity of personal and corporate insolvency regimes to deal with the impact of the pandemic on the financial position of individuals, corporations and incorporated associations.

The severity of the economic downturn associated with the enforced lockdown of society and cessation of many business activities, cannot be predicted at this time but even the most optimistic commentator is expecting an unpleasant outcome for the Australian economy.  The increase in unemployment may impact asset values (including the family home) notwithstanding zero interest rates and quantitative easing. The closure of businesses will put pressure on landlords, be they small-time investors or large sophisticated REIT’s. The breadth of the share market’s recovery will be dependent on the recovery of the economy and the underlying businesses operating therein.

Put simply, it may not get better for some time. There is unlikely to be a quick return to business as usual.

Emergency response

The Government has implemented some temporary emergency provisions to assist financially distressed individuals and businesses.pandemic, restructure

The increase in the debt threshold to $20,000 for statutory demands (10 times the present threshold) to corporations and bankruptcy notices (4 times the present threshold) and to individuals, will ensure the insolvency process is used for more material claims than at present.

Further, the increase in time to comply with statutory demands and bankruptcy notices to 6 months, will provide debtors with substantial breathing space in which to either raise funds or restructure their affairs.

The insolvent trading provisions have been suspended for at least 6 months.  A director, if acting in good faith and in the ordinary course of business, can incur debts whilst the company is insolvent or will become insolvent as a result of incurring that debt.

Whilst well-meaning, the provisions will in my opinion simply kick the can down the road for businesses who were not viable before the pandemic.

There is still time

Once the worst of the pandemic has passed, many Australian businesses will need to undertake financial restructuring in order to emerge as viable enterprises from the economic crisis. Our existing laws designed to facilitate restructuring may not be up to the task.

Businesses will be exposed to accrued lease liabilities (notwithstanding the expected prohibition on termination of leases for businesses impacted by the pandemic). Claims of employees who have been stood down or terminated will need to be dealt with. At present, unless employees receive what they will receive in a winding up they can collectively defeat a restructuring proposal. This is compounded by the Fair Entitlements Guarantee Scheme not paying claims associated with a deed of company arrangement. Unsecured and secured creditors will need to be managed.pandemic, restructure

Root and branch reform of the law and practice of insolvency is essential. However, it has failed to gain traction with the Government. After the pandemic, this is likely to change.

Should consideration be given in the present circumstances to the enactment of radical temporary restructuring provisions? These provisions should be designed to ensure the survival of as many of the businesses that were viable before the pandemic as possible. The provisions necessary are likely to offend many stakeholders but the short-term cost for some stakeholders will be countered by the long-term gains for most stakeholders by assisting the recovery of those financially viable businesses.

The Government must think outside the box to ensure our recovery from this crisis is fast, inclusive and sustained.

If you have any questions in relation to this article, please contact your local RSM adviser or David Kerr.