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It’s been a hard year for businesses big and small, across sectors.

ASIC warned that the challenges of COVID-19 would require recalibrating aspects of corporate strategy, risk-management framework, and funding and capital management strategy – among other things.

Mackay Goodwin has worked closely with company directors as they’ve faced down the impending failure of their businesses through no fault of their own, grappling with impacts ranging from employee welfare and job insecurity, to changing customer expectations and supply chain disruption. Meanwhile, these clients are scrambling to identify new growth pathways.

On top of that, time and money that perhaps should have been spent planning for the future has been tangled up in managing the ‘now’ of 2020, which continues still as directors deal with the ongoing uncertainty around how much COVID will affect the economy into 2021.

Navigating the safe harbour

Recognising that directors would need extra protections because of the COVID-19 crisis, the Federal Government introduced its emergency ‘safe harbour’ legislation in March 2020, allowing directors the time to assess their company’s position before developing further plans, either for turnaround or insolvency administration.

The relevant amendment, found in section 588GAAA of the Corporations Act 2001 (Cth)

suspended provisions that would otherwise hold directors personally liable for trading while insolvent as a kind of “defence” in some circumstances.

“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,” the Treasury media release explained, the aim being to “help to prevent a further wave of failures before businesses have had the opportunity to recover”.

The temporary safe harbour law is just that – temporary

Originally the safe harbour laws were set to expire in September 2020, but as economic impacts from the pandemic showed no signs of abating, the exemption was extended until 31 December 2020.

What isn’t made crystal clear in the legislation but is a real risk for companies, is that directors who trade on an insolvent business past the 31 December end date may be exposed to the usual insolvent trading provisions – for any period when the company was insolvent, should the company later end up in liquidation – even if that period was between March and 31 December 2020.

The COVID-19 safe harbour protection may only apply if directors take proactive steps to appoint an external administrator or liquidator prior to 31 December 2020. So, with this in mind, a prudent course of action for directors involves three steps.

1. Seek professional advice

As ASIC says, “Directors are encouraged to seek advice early from a suitably qualified and independent advisor about the company’s financial affairs and the options available to manage the disruption caused by COVID-19.”

Under current economic conditions, it’s incumbent upon directors to get your accounts and records in order and solicit expert advice – the earlier the better, for the best chance of surviving the present and thriving into the future.

To gain a full picture of your company’s prospects in this uncertain trading environment directors need to embark on a full and honest evaluation of the issues facing your company, including, for example, how much you’re relying on government subsidies.

You need to consider whether your business is still viable but perhaps suffering from temporary liquidity challenges that can be addressed through restructure; or in the case of an insolvency, whether the company is still feasible; or whether your business is insolvent with no viable option to save it.

With the right advice, directors may be able to see the COVID-19 crisis as an opportunity to transform your business and to create options when it seems like there are none: there may well be a better outcome than the appointment of a liquidator or voluntary administrator.

2. Appoint an external administrator before 31 December, if deemed necessary

As outlined above, safe harbour laws state that an external administrator must be appointed to your company before the moratorium’s expiry on 31 December 2020, if the debts incurred are to be excluded from a liquidator’s claim for insolvent trading.

So – if you are in any doubt about whether you might need to rely on the COVID-19 safe harbour protection, or if there is any risk that your company might be placed into external administration in the future, you mustconsider whether an appointment of a voluntary administrator or liquidator should be made on or before 31 December 2020.

In the case where a company is placed into formal insolvency, directors will need advice on compliance with regulatory obligations on provision of books and information and assistance to a liquidator, administrator or controller.

3. Planning for the long term

While there may be a temptation to focus on the ‘now’ and all its pressing needs, plans must be made for a time beyond mere survival, to recovery and beyond. Directors must use this year of profound change as a lesson in the absolute necessity for business continuity plans and corporate resilience building.

Directors may need advice on lending, cashflow, restructuring, forensics, improving efficiencies to avoid financial trouble and putting together an investigative accounting report. Sound planning is best achieved through a collaborative process between you and your advisory expert.

How Mackay Goodwin can help

We follow a mantra at Mackay Goodwin: If you don’t give up, we won’t either.

While some firms take an ‘Insolvency first’ approach, Mackay Goodwin is a corporate advisory, restructuring and recovery firm with an approach that focuses on keeping businesses viable and able to trade into the future. Ultimately our advisors play the role of recovery partner.

We employ a team of liquidators registered by ASIC that are experienced in designing solutions to any insolvency or corporate recovery issue. Mackay Goodwin is an AFR Top 100 Accounting firm and ranked in AFR Fast Starters as Australia’s number 1 fastest growing restructure, turnaround and Insolvency company.

Now is always the best time to explore what the options are for your business.

Call us on 1300 062 950

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