There has been much commentary on the financial cliff that the Australian economy will face once many of the current stimulus packages and insolvency relief is either removed or cut back.
In March 2020, a number of temporary insolvency relief measures were introduced (by way of the Coronovirus Economic Response Package Omnibus Act 2020) that largely slowed down the ability of creditors to wind up a company as well as providing temporary relief for directors from the insolvent trading laws. At the same time, the JobKeeper and JobSeeker initiatives have assisted business cashflow and avoided unemployment figures skyrocketing.
Whilst these initiatives have been welcomed, there is a common view, at least based on anecdotal evidence, that the measures have also created a number of ‘zombie like’ businesses who were always destined to fall over but have been artificially kept alive during this time and once the various initiatives are removed or curtailed, are likely to enter the insolvency scrap heap.
It is not financially feasible (and many would argue, responsible) for Government to indefinitely prop up businesses that will ultimately fail. Many businesses simply fail because of poor management (especially poor cashflow management) and/or because they are simply under-capitalised. For these companies, all that the temporary insolvency relief measures and JobKeeper/JobSeeker initiatives have done is to ‘kick the can down the road’ for a little longer.
However, there are a number of businesses that with proper financial ‘engineering’ whether it be by the introduction of further capital, a change in management with some debt forgiveness or a longer debt moratorium are capable of being restructured. For companies, that may be via a deed of company arrangement initiated with the appointment of a voluntary administrator. The voluntary administration procedure may also enable the orderly sale of the core business to another operator that is better placed (financially and operationally) to run the business. This is particularly the case where the business comprises a well-recognised brand.
ATO should support a DOCA if the administrator recommends one
From my experience at least, the success or failure of a deed of company arrangement often depends on the vote of the Australian Taxation Office (ATO). I have seen many proposals that are supported by the general body of creditors and recommended by the voluntary administrator over a liquidation but fall over because the ATO simply doesn’t support the proposal and the recommended simple majority vote is not achieved.
Often, directors and the administrator are left scratching their heads on why the ATO has not supported the proposal when commercially, that would seem to be the logical way to proceed. Whilst the ATO’s attitude may be understandable where the directors behind the businesses have a past history of corporate failure or there is evidence of illegal phoenix activity or other serious breaches of the law, it is not clear why the opinion of the voluntary administrator who is required to undertake a financial analysis and investigation into the company’s affairs is not adopted by the ATO.
If the Federal Government is keen to provide some semblance of a smooth transition of businesses surviving via a restructure it should look to introduce some ATO protocols that would require the ATO to support and vote in favour of a corporate restructure via a deed of company arrangement (DOCA) if the proposal is supported by the administrator over a winding up of the company. In my view, this would likely lead to fewer company liquidations and, in turn, possibly save many jobs.
Secured Creditors and Landlords
Similarly, the Corporations Act already provides protection to secured creditors and landlords in the event of a voluntary administration and except in limited circumstances, their security or property ownership rights are not compromised or affected by a deed of company arrangement. Currently, however, a secured creditor and landlord is still entitled to vote in respect of a proposal and may choose to vote against a DOCA proposal regardless of its effect on its rights. It seems inconsistent with the objectives of the voluntary administration process where one or two creditors who are otherwise protected are entitled to vote down a DOCA proposal when the general body of creditors and the voluntary administrator supports it.
The Federal Government should consider introducing a rule, even if only temporary, to enable an orderly restructuring period, that would prevent a secured creditor or landlord from voting against a DOCA proposal if their rights (and security) would not be affected by the terms of the proposal and the DOCA proposal is supported by the voluntary administrator. Furthermore, their debt should be disregarded in calculating the relevant majority resolution required to enable a DOCA resolution to pass. The general rule could be made subject to a Court otherwise allowing the secured creditor or landlord to vote against the proposal if the secured creditor or landlord was able to show that the DOCA proposal did somehow affect their position or powers.
These restrictions should also apply to creditors who would have otherwise until recent times been unsecured creditors but or the fact that they have inserted ‘charging clauses’ into their credit terms of trade and personal guarantees and who have the ability to frustrate a valid restructure proposal.
ATO Garnishee notices
Another suggestion is for the Government to mandate the temporary suspension on the use of Garnishee notices by the ATO as a debt collection tool. There are a number of examples where the zealous use of garnishee notices by the ATO has prevented a company restructure. The use of this collection regime can be catastrophic particularly in the construction industry where the process is often deployed as a debt collection measure and effectively kills the cashflow of a construction company where margins are slim at the best of times.
Whilst some of these proposals may seem draconian (and I am sure that there are many other possibilities), they are much cheaper than direct Government cash funding and will, in my opinion at least, assist with an orderly transition from the current Government packages and allow business with good business fundamentals to survive and avoid what would otherwise be a very hard landing when the ‘rubber finally hits the road’.
Some may say that the amelioration of the hard core rules will be open to abuse but in my view, we need to have some trust in the insolvency practitioners who are appointed as voluntary administrators, who as ‘officers of the Court’ and who in some cases, have decades of insolvency experience, are the best place to provide an opinion on whether a proposed DOCA is in the best interests of the creditors or whether an orderly winding up is merited.
It is hoped that the Government speaks to key stakeholders in the insolvency profession and seriously looks at some of these measures.