Up Again Australia: Governance

Corporate

1. What are the key topics that boards should focus on to ensure proper discharge of their duties as directors, as their businesses return to work following a lockdown?

Regulatory and occupational health and safety compliance
Comply with all government regulations applicable to the workplace and work practices and consider whether government guidelines and recommendations should be followed, in particular work health and safety recommendations, as employees return to the workplace on a large scale.

This includes implementing any physical changes to the workplace to accommodate physical distancing and hygiene requirements, making hygiene facilities and products available, and ensuring cleaning contractors action any changes to cleaning routines and processes in the workplace.

Also implement procedures for responding to any employee contracting COVID-19 and for ensuring the health and safety of employees particularly vulnerable to COVID-19.

Business plan and practices
Consider whether any change in business model, plan, performance, practice or processes is required, and whether, for listed companies, an announcement to the market of any such change is required. Consider whether:

  • your business needs to be flexible to accommodate unpredictable levels of business for an indefinite period; and
  • the recent experience has identified any long-term changes that your business would benefit from adopting (e.g. more flexible work practices and less floor space).

Review your risks
Conduct a fresh internal risk review to ensure your risk assessment includes all COVID-19-related risks.

Timetable for relief measures
Be mindful of the time limits on temporary measures during lockdown regarding relief and legal and regulatory obligations, and make plans for a transition back away from them (e.g. JobKeeper, annual reporting and annual general meetings).

2. Should boards adopt particular governance practices in this context?
Boards should assess and monitor organisational processes, practices and compliance to identify any areas that need change or improvement. This will allow for swift response to changing government recommendations, including both the relaxing and tightening of restrictions. Ensure that health and safety compliance policies are appropriately updated and adhered to. Appoint appropriately skilled and qualified people to champion and monitor adherence and report to the board regularly and with a greater level of detail than is standard.

Ensure that the business has an effective communication plan for interacting with employees, including those employees who continue to work remotely. The communication plan should work both ways – that is, practices should ensure that employees are not only receiving appropriate instruction and interaction with team members, but are also appropriately communicating information that their managers need to know.

Restructuring

3. Your company is facing liquidity issues as a result of COVID-19:
a. What are the repercussions for continuing to operate your company?

The Australian government has passed new legislation providing for a relaxation of the application of the statutory insolvent trading provisions under the Corporations Act 2001 (Cth) (Act) and effectively provides for a six-month moratorium against directors having personal liability for trading a company while insolvent (i.e. it cannot pay its debts as and when they fall due).

The statutory provisions imposing personal liability on directors for insolvent trading (s 588G(2) of the Act) will be held in abeyance so that directors will not be liable for debts incurred by an insolvent company if the debt is incurred during the next six months (or longer period if prescribed) and in the ordinary course of its business during that period. The legislation is silent on debts incurred that are not in the ordinary course of the company's day-to-day business operations.

The moratorium does not apply retrospectively. The moratorium only applies to debts incurred in the next six months. It does not apply to debts incurred before the legislation came into force on 25 March 2020.

Other statutory and common law directors’ duties still apply.

b. Do you have to file for insolvency if your company cannot pay all its debts as they fall due?
If the company cannot pay its debts as and when they fall due, the company is insolvent. Ordinarily, the company should then be put into voluntary administration or straight into liquidation to avoid directors being personally liable for insolvent trading.

However, given the six-month moratorium on insolvent trading laws detailed above, there is now a little more flexibility. Careful consideration should be given to whether the underlying business of the company will be feasible when the current pressures of the COVID-19 crisis have passed. Professional advice should be sought from an insolvency practitioner and a lawyer who can assist in assessing the position of the company and preparing a detailed turnaround plan.

c. Are there any steps that should be taken to minimise the risk of your actions as director being challenged?
A director may rely on the new temporary safe harbour in relation to a debt incurred by the company if:

  • the debt is incurred in the ordinary course of the company’s business;
  • the debt is incurred during the six-month period starting 25 March 2020, or a longer period as prescribed by the regulations; and
  • the debt is incurred before any appointment of an administrator or liquidator of the company during the temporary safe harbour application period.

A director is taken to incur a debt in the ordinary course of business if it is necessary to facilitate the continuation of the business during the six-month period that began on 25 March 2020. This could include, for example, a director taking out a loan to move some business operations online. It could also include debts incurred through continuing to pay employees during the coronavirus pandemic.

Directors may wish to document their expenses starting from 25 March 2020 and focus on activities that will continue to keep their business afloat during the next six-months. Directors need to prove there is a reasonable possibility that the debt was incurred in the ordinary course of business.

Similarly, a holding company may rely on the temporary safe harbour for insolvent trading by its subsidiary if it takes reasonable steps to ensure the temporary safe harbour applies to each of the directors of the subsidiary, and to the debt, and if the temporary safe harbour does apply. The holding company bears an evidential burden in relation to these matters.

Further, there are a number of steps directors should consider taking to protect themselves from future criticism:

  • prepare a detailed survival or turnaround plan;
  • consider ways the company can minimise its expenses;
  • actively engage with its key suppliers, banks and landlords; and
  • seek professional advice from insolvency practitioners and lawyers.

d. Will your company be wound up if you fail to make payments when due?
It is now more difficult for creditors to wind up a company. If a creditor has served your company with a statutory demand on or after 25 March 2020, your company will now have six months (previously 21 days) to pay the demanded sum.

Further, from 25 March 2020, the monetary threshold to issue a statutory demand has increased: a statutory demand may be issued only for a debt of AUD20,000 or more (previously AUD2,000). If, after six months, the debt demanded in the statutory demand has not been paid, the creditor will be entitled to start winding-up proceedings in court against the company.

You should be open with your company’s creditors about the financial challenges and, where possible, try to negotiate moratoriums or more favourable payment terms, carefully documenting all communications with creditors.