Regulations will be made to extend the temporary increase in the threshold at which creditors can issue a statutory demand on a company and the time companies have to respond to statutory demands they receive. The changes will also extend, Treasurer Josh Frydenberg noted in a statement, the temporary relief for directors from any personal liability for trading while insolvent.

“These changes will [help prevent] a further wave of failures before businesses have had the opportunity to recover,” Mr Frydenberg said.

“The extension of these measures will lessen the threat of actions that could unnecessarily push businesses into insolvency and external administration at a time when they continue to be impacted by health restrictions.

“As the economy starts to recover, it will be critical that distressed businesses have the necessary flexibility to restructure or to wind down their operations in an orderly manner.”

Impact of the extension

Speaking to Lawyers Weekly, McCullough Robertson partner David O'Farrell said the announcement would effectively prevent any substantial wave of winding-ups or bankruptcies until the new year.

“There is continuing relief to directors from liability for insolvent trading, and prevents reliance on statutory demands and bankruptcy notices,” he said.

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According to Allen & Overy partner David Walter, “the measures in place from March to September may not be the sole or even dominant cause of the reduction in formal insolvency appointments throughout that period – other support packages such as JobKeeper and tax administration policy/practice changes will certainly have played a part. However, the measures do contribute to an easing of the pressure on debtors and their directors.”

For Hamilton Locke partner Nick Edwards, however, the government’s decision – “albeit not unexpected” – simply continues to disincentivise action for distressed businesses and continues to put pressure on those who deal with such distressed businesses, including suppliers, creditors and landlords.

“All of whom are experiencing their own pain. An important thing people need to understand is that the relief measures of themselves are not actually fixing businesses, rather they are designed to provide breathing room and staving off immediate insolvency appointments,” he argued.

“It is now incumbent on business and directors to use that clean air to start considering ways to address unsustainable debt burdens during the period leading up to the end of 2020.”

Subsequent impact on legal work

For firms working in the insolvency and restructuring space, Mr O'Farrell outlined, there will continue to be a reduction in debt enforcement work, and consequent windings-up and bankruptcies. However, he added, the intended purpose of the extensions is “to provide a further opportunity for business to take advice and restructure their affairs”.

“Law firms should be actively assisting clients to consider their options and preposition for the end of the moratoriums. From a strategy perspective, the options should include the potential for the introduction of additional restructuring tools,” he suggested.

Mr Edwards agreed, musing that in an ideal world, the extension will see an uptick in contingency planning work as businesses consider restructure options.

“This is not an alteration in the strategies available to businesses per se, but hopefully with a renewed deadline more businesses start to plan,” he said.

“One thing directors in particular need to be aware of is that they have an ongoing duty to act in the best interests of the companies to which they are appointed which has not been altered, and simply hoping for a further extension to the relief won’t cut it nor does a head in the sand mentality.”

Mr Walter backed this, saying directors must avoid a false sense of security.

“Simply allowing ‘business as usual’ is probably not a sensible course in the current environment for many businesses – directors need to continually assess the options, plan for the future and implement those plans,” he noted.

Collaboration with in-house teams

Businesses and in-house teams should be acting now, Mr Edwards suggested, by way of engaging advisers (including restructuring and insolvency specialists) to “assess the current position and strategise how to address the issues in the lead-up to the winding back of the temporary measures”.

“This will for many involve hard decisions – however those that act sooner rather than later will be in a better position,” he noted.

The great fear, Mr O'Farrell said in support, is “a ‘deluge’ of insolvencies, which could prompt a catastrophic decline in business confidence and derailing any opportunity for near-term economic recovery”.

“Most in-house teams have never experienced a recessionary shock of this nature, and it will result in an intense need for expert advice and guidance. Insolvency groups should be working with in-house teams to anticipate any further restructuring reforms, and extensions, and to decide on how to position the business,” he advised.

Considerations for 2021

Looking ahead to a time in which the temporary relief measures no longer exist, Mr Edwards said there will be a spike in pure insolvency and restructuring work, “as there is an increased number of formal insolvency appointments – be that voluntary administration or liquidation”, he explained.

“Companies who take advice and begin to engage with stakeholders will be better placed to restructure and survive. In the context of the extended relief ideally, we should see an increased amount of planning work (be it under safe harbour or otherwise) between now and the end of the year as businesses consider how to deal with the build-up of unsustainable debt,” he noted.

“There must, however, be encouragement for this to occur both from government as well as financial institutions – one thing we have seen is that the measures have lulled many businesses and directors into a false sense of security. The clock is unfortunately ticking and the liabilities simply continue to accrue.”

The extension of the moratoriums, Mr O'Farrell, hypothesised, may best be viewed merely as a “holding position” while the federal government determines its approach managing the anticipated avalanche of insolvencies.

“Much will depend on the government’s ultimate exit strategy and there is a real possibility that additional, more flexible, restricting tools may be introduced. As always, much will depend on the detail,” he said.

Other concerns

The big fear lawyers might have, Mr Edwards detailed, is that many businesses, particularly smaller players, will not act and come the end of the measures there will be a flood of terminal insolvencies.

“What I mean by terminal is that there will be no other option than liquidation because such companies will have burnt through the last of their cash reserves and eroded the goodwill of the business so there is no chance for a restructure or a minimal return to creditors. The liquidator appointed will be left to sell anything that’s left and then simply turn off the lights,” he warned.

“I also suspect the wave won’t hit until February and beyond because of the time of year the measures are slated to finish (i.e. Summer holidays). In saying that, however, I wouldn’t be surprised if we don’t see insolvencies around the Christmas period, as fatigue kicks in and individuals look to unburden themselves of the stress associated with running a distressed business before the new year starts.”

Creditors, Mr Walter mused, will need to exercise more vigilance than ever in extending credit.

“Placing creditors in this position – where a liquidation and recovery litigation is simply unavailable, and a debtor-driven outcome is a default – represents a considerable shift toward a debtor and director-friendly environment. That is not consistent with the Australian insolvency and turnaround landscape,” he said.

What we should therefore expect to see, Mr O'Farrell said, is “ongoing, and more strident, debate about what policy setting the federal government should apply to restructuring reform (temporary or otherwise) as part of its exit strategy”.

“This will focus on whether to shift the policy setting from our current creditor-controlled process, to give greater control to directors and debtor entities,” he concluded.