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Insolvent Trading Advice for Clients Affected by COVID-19

By Ellen Ferris, a Solicitor in Matthews Folbigg’s Insolvency, Restructuring and Debt Recovery Group

In the current climate, many accountants may have clients experiencing financial distress, including directors seeking advice on how to avoid personal liability for trading whilst insolvent.

What advice should accountants be giving their clients in this environment? What advice do directors need to hear?

Insolvent Trading – The Danger

Firstly, it is important to understand how the law defines insolvent trading. The law defines insolvency as an inability to meet debts as and when they are due and payable. Insolvent trading, in simple terms, relates to debts incurred whilst a company is insolvent.

Secondly, however, determining insolvency at any point in time is a very complex assessment.  It does not include a temporary shortage of liquidity, but looks at the company’s assets as a whole and its cash-flow.  In the current COVID-19 climate, many businesses will be experiencing temporary liquidity problems, however the questions is whether these are going to lead to longer term shortages of capital.  Given what is going on in the world, who knows?
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Creditor-Defeating Dispositions: Illegal Phoenixing Amendments 2020 #2

By Andrew Hack, Solicitor, and Stephen Mullette, Principal, of Matthews Folbigg Lawyers, in our Insolvency, Restructuring and Debt Recovery Group.

At the beginning of this year, the Australian Government enacted amendments to the Corporations Act 2001 (Cth) (“the Corporations Act”) which include a variety of new remedies available to liquidators, creditors and ASIC, aimed at combating “illegal phoenixing activity”. The new remedies target not only the directors of insolvent companies but also third parties involved in controlling or advising the directors in respect of certain transactions designed to defeat the claims of creditors against insolvent companies.

The legislation is the Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 (Cth) which came into effect as of 18 February 2020. The amendments introduce a new concept, called a “creditor-defeating disposition”. A new section in the Corporations Act, section 588FDB, defines a creditor-defeating disposition as a disposition of property of a company:

  • For less than the lower of the market value of the property or the best price reasonably obtainable; and

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Accountants Keeping Clients Afloat During COVID-19

By Ellen Ferris, a Solicitor in Matthews Folbigg’s Insolvency, Restructuring and Debt Recovery Group.

Accountants are being swamped by directors caught up in the effects of a global pandemic and the consequences of shutdowns and quarantine. Accountants’ own businesses are in the same boat.

How to advise clients during this time? The Australian Restructuring Insolvency and Turnaround Association (“ARITA”) has released helpful guidance for accountants seeking to help their clients at this time. These resources can be accessed via the below link:

Matthews Folbigg Lawyers has a legal team dedicated to Insolvency, Restructuring and Debt Recovery. All of the solicitors on this team are members of ARITA, and have been following the changes in this practice area closely.

Our team are ready to advise accountants with clients caught up in this complex area. If you have any questions about these changes, or would like to discuss these resources, please contact a Principal of Matthews Folbigg Insolvency, Restructuring & Debt Recovery Team:
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Helpful Resource on Directors’ Duties During Disaster

By Ellen Ferris, a Solicitor in Matthews Folbigg’s Insolvency, Restructuring and Debt Recovery Group.

Directors’ duties are changing daily as the Government makes new laws to deal with the impact of COVID-19. However those duties have not been extinguished and it is important that responsible directors keep on top of their statutory obligations (and personal liabilities). The Australian Restructuring Insolvency and Turnaround Association (“ARITA”) has released helpful guidance for directors. These resources can be accessed via the below link:

  • Guidance with respect to directors’ duties – ARITA News

Matthews Folbigg Lawyers has a legal team dedicated to Insolvency, Restructuring and Debt Recovery. All of the solicitors on this team are members of ARITA, and have been following the changes in this practice area closely.

Our team are ready to advise directors  on this complex area. If you have any questions about these changes, or would like to discuss these resources, please contact a Principal of Matthews Folbigg Insolvency, Restructuring & Debt Recovery Team:
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COVID-19 and Corporate Insolvency: What obligations do directors have?

By Andrew Hack, Solicitor, and Stephen Mullette, Principal, of Matthews Folbigg Lawyers, in our Insolvency, Restructuring and Debt Recovery Group.

Justifiably, many companies will be concerned about the current and future impact COVID-19 will have on their ability to pay debts and wages. Australia has strict duties on company directors to ensure companies do not continue to trade whilst insolvent. The duty applies in circumstances where there are reasonable grounds for suspecting the company is or would become insolvent and the director does not prevent the company from incurring further debt. Directors may become liable for the debts incurred as of the date the company became insolvent. Civil penalties can also apply.

Seemingly, given the breadth of discussions in the media regarding the impact of COVID-19, it may be difficult for directors of financially troubled companies to argue there were not reasonable grounds to suspect insolvency.

However, the Australian Government has passed legislation to include temporary relief for directors’ personal liability for insolvent trading. The proposed bill introduces a new safe harbour regime in response to the coronavirus, where a debt is incurred ‘in the ordinary course of business’.
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Pre-Insolvency Advisers (and Several Innocent By-Standers) in the Cross-Hairs: Illegal Phoenixing Amendments 2020 #1

By Andrew Hack, Solicitor, and Stephen Mullette, Principal, of Matthews Folbigg Lawyers, in our Insolvency, Restructuring and Debt Recovery Group

Recent reforms have sought to clamp down on ‘illegal phoenix’ activity and advisers. Illegal phoenix activity is never properly defined, but is generally a reference to a business or its assets being deliberately transferred to a related entity with the intention of avoiding payment of creditors. In a series of blogs Matthews Folbigg will look at this issue and the Government’s recent legislative ‘Illegal-phoenix’ amendments targeting illegal phoenix advisers. However the changes highlight some of the very real dangers for directors, as well as for accountants, lawyers and business advisers who may inadvertently be now involved in criminal activity.

In December 2019, the Australian Small Business and Family Enterprise Ombudsman (“ASBFEO”) released a Discussion Paper as a part of an Insolvency Practice Inquiry. The Discussion Paper briefly mentions the common occurrence of small businesses seeking assistance from pre-insolvency advisers. The Discussion Paper comments that “The word adviser can be misleading as there are no requirements to be licenced, no regulation of their practises and no dispute resolution process if things go wrong.” The Discussion Paper can be found on ASBFEO’s website at this link.
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COVID-19 and Corporate Insolvency in Australia

By Andrew Hack, Solicitor, and Stephen Mullette, Principal, of Matthews Folbigg Lawyers, in our Insolvency, Restructuring and Debt Recovery Group.

This month, the World Health Organisation declared COVID-19, also known as the Coronavirus, a pandemic. Governments are responding by placing travel bans and quarantine orders on people coming into and leaving the country. Businesses are responding by closing premises and making arrangements for employees to work from home. Some are even closing down entirely.

On Sunday 22 March 2020, the Prime Minister announced new lockdown measures forcing pubs, cafes and restaurants to close with exception to takeaway. Other businesses to close are cinemas, casinos, nightclubs, gyms and indoor sporting venues.

As the virus continues to spread and the global death toll increases, the full impact that COVID-19 will have on the economy is yet to be known. Australian stocks continue to plummet and very recently, ratings agency Standard & Poor’s forecast a global recession in 2020. It is reasonable to consider that over the coming months there will be many companies and businesses suffering from the conditions brought about because of COVID-19, many of which will ultimately end up insolvent and in external administration.
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Government restrains creditor enforcement action in wake of COVID-19

By Andrew Hack, Solicitor, and Stephen Mullette, Principal, of Matthews Folbigg Lawyers, in our Insolvency, Restructuring and Debt Recovery Group.

As mentioned in yesterday’s blog, the Australian Government announced it would introduce a bill, to be fast-tracked through the Parliament, to address the economic crisis as a result of COVID-19. The bill was proposed on 23 March 2020 with the third reading agreed to in the Senate on the same day. As at 24 March 2020 it has passed both houses.

Much of the legislation provides substantial subsidies to businesses as well as payments to individuals affected by the economic downturn. However, a significant part of it provides relief to distressed businesses. The main changes are:

  1. An increase in the cap on issuing creditors statutory demands from $2,000 to $20,000;
  2. An increase in the cap on issuing bankruptcy notices from $5,000 to $20,000;
  3. For both statutory creditors statutory demands and bankruptcy notices, the period of compliance has been increased from 21 days to 6 months; and

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