NEWS & INSIGHTS
Insolvency State of Play
INSOLVENCY STATE OF PLAY
Insolvency numbers dropped to a decade low as expansionary monetary policy, government stimulus, a soft Australian Taxation Office (ATO) enforcement position and debt recovery-limiting legislation all worked to preserve jobs and minimise recessionary risk as the pandemic played out. However, these moves provided extended life to “zombie” companies that would ordinarily have been wound up. Various industry sectors continue to feel the pressure.
CONSTRUCTION & PROPERTY
Builders are working to complete developments on fixed-price contracts entered into up to three years ago, while now facing higher labour and input costs and increasing financing pressure. The ATO is requiring delayed tax debt to be paid. While some builders have negotiated improved payment terms enabling cost escalation relief, many have not. The increase in the number of insolvency appointments in the past two years has risen steeply.
ACCOMMODATION & FOOD SERVICES
The impact of rising interest rates and rental hikes over the past 18 months are expected to persist into 2024, placing further pressure on household discretionary spending. As this drops, consumer behaviours will change, creating challenges for the hospitality industry. Potential responsible gambling legislation under discussion might also impact earnings and valuations in the club and pub sector.
RETAIL TRADE
Household spending on discretionary goods and services is 0.6 per cent lower compared to a year ago, according to the latest Australian Bureau of Statistics data. Driving the fall in discretionary spending over the year was 4.8 per cent less spending on furnishings and household equipment, and 3.4 per cent less on clothing and footwear as households respond to cost-of-living pressures. With discretionary spending expected to continue to tighten, input cost and overhead management will be critical for many retailer operations.
For major expenditure, the commercial rationale and its link to the restructuring plan must be interrogated. Care should be taken to avoid undue risk. Equally, facilitating a turnaround of the company’s situation entails risk. There is no clear answer. Each significant debt to be incurred must be considered on its merits. Considering, reviewing and documenting the rationale is key.
How regular should meetings be?
Once the board pursues a restructuring plan, it should meet more regularly to oversee the plan’s implementation and to ensure the requisite “better outcome” remains reasonably likely. At a minimum, the board should meet monthly. For a heightened level of concern, fortnightly, and if the company is in crisis, weekly.
What if the problem is terminal?
Safe harbour is only available while the course of action is reasonably likely to lead to a better outcome. If the company’s difficulties become terminal, directors will no longer be protected. Directors should, at this point, declare insolvency.
Can the company raise new money while in a safe harbour?
The company can still raise fresh capital. However, directors should be mindful of disclosure obligations relating to the facts underlying the need for safe harbour.
What is the best advice for directors? When there is financial distress, calm heads are needed. Most lawyers no longer quote case law to clients. But one quote directors always ask to be requoted comes from a leading insolvent trading case, Hall v Poolman [2009] NSWCA 64 — “a reasonable time must be allowed to a director to assess whether the company’ s difficulty is temporary and remediable, or endemic and fatal”.
Basically, it provides judicial imprimatur for taking time to deal with financial distress unless things are completely dire. Panicked decisions should not be made. Time can be taken, but if the position is terminal, there’s no point delaying the inevitable. ■
Michael Sloan is a partner and Daniel Dai a lawyer with Ashurst’s restructuring, insolvency and special situations practice.
FORECAST
As 40 per cent of fixed-rate home loans outstanding in January 2022 mature by December 2023 (with another 20 per cent maturing by December 2024) and further rental pressure, sectors reliant on consumer spending might experience reduced demand and market uncertainty is likely to drive businesses to postpone or reconsider expansion and investment. This lack of investment will compound any economic slowdown. Increased borrowing costs will heighten the challenges being faced for many companies in the construction, hospitality, retail and other industries. By Andrew McCabe and Isha Yadav of Wexted Advisors.
SAFE HARBOUR SUCCESS STORIES
Jason Preston, chair of McGrathNicol, says using safe harbour has resulted in a better outcome for several companies the restructuring advisory has worked with recently.
Over the course of 18 months, a large renewable energy operation was able to renegotiate with fnanciers and contractors, and recapitalise in a way that stabilised its projects and avoided insolvency.
A construction contracting business that incurred losses on projects and was in breach of banking covenants used safe harbour to prepare a turnaround plan and renegotiate with contract counterparties.
“The business used the safe harbour period to restructure the business to the point where it was able to raise new capital,” says Preston. “Absent the safe harbour provisions, a number of directors were unlikely to support continuing to trade and would likely have appointed voluntary administrators. Safe harbour afforded them the breathing space and governance framework required to achieve a better outcome for the company without exposing themselves unnecessarily to personal liability if the plan was ultimately unsuccessful.”
aicd.com.au 79
September 2023
Published 10th April 2024