Corporate collapses looming in light of downturn

By Jerome Doraisamy|14 July 2020
David O’Farrell

Debt crises are set to hit businesses across the board, assuming they haven’t already. Getting advice early and acting on it are critical, says one partner.

When asked how and why corporate collapses are on the horizon across the Australian economy, McCullough Robertson partner David O’Farrell summed it up in one word: “debt”.

“At present, many entities are managing or deferring their payment obligations in reliance on stimulus measures and moratoriums. These include moratoriums on winding up actions and insolvent trading, [JobKeeper] payments and other support measures, and debt deferrals by financiers and the ATO,” he explained.

“As those measures cease or phase out, businesses will need to face the reality of having to meet those obligations in uncertain market conditions. At the entity level, there will also be particular industries and entities whose markets have collapsed – Virgin is an early example – and may face a very different trading environment.”

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These broader impacts will start to hit businesses later this year, Mr O’Farrell predicted, and will gradually increase when 2021 arrives.

“The current stimulus measures are in place until September 2020, although various of the measures are being extended until the second quarter of 2021. There is, however, a clear shift in messaging,” he noted.

“The measures were introduced in March against a backdrop of great uncertainty and fear, and they provided blanket relief. There will now be a greater emphasis on businesses now facing up to the reality of meeting their obligations in the new market conditions.”

Many formerly sound businesses may be facing a debt crisis for the first time, Mr O’Farrell continued.

“The moratorium was intended to, and in many cases has, given them time to deal with it. The key is to take advice, and act on it as early as possible. There are various restructuring tools available to assist directors [to] navigate the risks and either save their business, or achieve an orderly resolution,” he said.

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The key for legal departments and their external law firms will be to “act early”, he posited: “generally, the earlier an entity seeks advice the greater the range of restricting options”.

“For example, a board might decide it is preferable to appoint administrators and restructure debt obligations now rather than wait to emerge from the moratoriums with uncertain prospects. Just as importantly, advice should be taken from genuine and reputable specialists. Internal legal departments have a critical role in sourcing and vetting external [advisers],” he advised.

“Particular care is needed to limit the risks for directors and officers (including in-house counsel) for engaging in transactions which breach the various ‘[anti-phoenixing]’ laws. Unfortunately, the insolvency industry attracts a small number of unscrupulous operators who promote schemes which, although appearing attractive, may breach these laws or otherwise will cause wider harm to the business community.”

Corporate collapse is a time of great distress for directors and officers, Mr O’Farrell mused, and “more than ever clients need clear and concise advice” about their risks and options, he submitted.

“An experienced adviser should be able to advise about what, if any, restructuring tools might be available to and work with other professional advisers to implement the chosen strategy.  External firms also have an important role in assisting in-house teams to stay up to date with the rapidly evolving regulatory and policy climate,” he said.

Unfortunately, Mr O’Farrell concluded, the reality of commerce is that “not all businesses can be saved, or should be saved”.

“External and internal legal terms will play an important role in managing the looming debt crises. Most lawyers are not (and need not be) expert in insolvency, but should be aware that significant risks exist when in the ‘insolvency zone’ and that acting early is often the key to a successful outcome,” he said.

Corporate collapses looming in light of downturn
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