While social distancing lockdown measures may be easing across Australia, the economic fallout from COVID-19 is in its infancy. Cashflow for many businesses have dried up, and sadly, for many more their coffers will soon be empty. Undeniably, the financial impact of the lockdown measures is (and will be) immense.

For employers and employees alike, the Jobkeeper payment and other stimulus measures are helpful and is undoubtedly a lifeline. For many others, the simple concept of recovering financially from the economic knock-on effect of COVID-19 seems unachievable and quite simply unrealistic. Getting proper informed advice as to what legal options you may have available to you as an individual, to help you manage your debt, has never been more important.

Many Australians are now (or will soon be) faced with unmanageable debt. The earlier you seek help, the more informed you’ll be and likely to gain control of your situation.

Insolvency -What are my options?

At the outset, it is important to note that you are deemed to be insolvent under the Bankruptcy Act 1966 if you can’t pay your debts when they fall due. A scary concept given the cashflow constraints faced by so many Australians right now.

If you are insolvent, then you are at risk of being made bankrupt by one of your creditors (if the relevant bankruptcy thresholds are met, and the applicable bankruptcy procedures followed). However, you may have other options available to you, that may see you avoid formal bankruptcy (either now or at some time in the foreseeable future).

If you have unmanageable debt, you generally have four formal insolvency options available to you, or, other informal options such as informal negotiations with your creditors. Regardless of which option you are considering, the consequences of the decisions you make now as to how to deal with your creditors, can be severe.

Overview of formal Insolvency options:

1. Temporary debt protection (TDP) – This option provides you with a six-month protection period from being pursued by unsecured creditors. This is a serious step and advice should be obtained prior to being taken as the consequences can be serious.

*Caution – while creditors may be unable to enforce recovery of unsecured debts from you if you choose this option, they are still able to commence or continue legal action, including to obtain judgment against you. Creditors just won’t be able to enforce that judgment via bankruptcy for six months. Secured creditors on the other hand, can continue recovery of their secured debt. By lodging a temporary debt protection form (formally called a declaration of intention to lodge a Debtors Petition) you are committing an act of bankruptcy and importantly, some debts are not covered by TDP.

2. Bankruptcy – Last for three years and one day and at the end of this period, you are released from most of your debts. Although bankruptcy releases an individual of their debts (or most of their debts), owed at the time of the bankruptcy, there are serious consequences of bankruptcy and you should seek advice if you are considering self-declaring bankruptcy by way of a Debtors Petition.

Consequences of bankruptcy may include impacts on your ability to get credit, restrictions on overseas travel or gaining some types of employment or hold certain licences (such as a builder’s licence). Further, bankruptcy details, such as a bankrupt’s name, address, date of birth and occupation are available to the public via a Government database known as the National Personal Insolvency Index (“NPII”) permanently and usually on databases of credit reference agencies.

3. Debt Agreements – a formal binding agreement between you and all your creditors whereby your creditors agree for you to repay a reduced sum, over a period of time (which you can afford) in final and full satisfaction of the full balance(s) outstanding. These payments are made to your Debt Agreement Administrator, who then distributes the funds to your creditors. Once the agreed payments are made, and the agreement comes to an end, your debts are discharged.

*Caution – There are eligibility criteria for Debt Agreements, for example, you can’t propose a Debt Agreement to your creditors if you owe more than $118,063.40 in unsecured debt, or your after-tax income is more than $88,547.55, or your divisible assets add up to more than $236,126.80. Further, some debts will not be released or included in a Debt Agreement and will still need to be repaid. Additionally, entering into a Debt Agreement may effect your ability to get credit and may appear on the NPII or other public register for a period of time.

4. Personal Insolvency Agreements (PIA’s) – similar to a Debt Agreement and is a formal binding agreement between you and all your creditors whereby your creditors agree for you to repay a reduced sum, over a period of time. However, a PIA involves a trustee taking control of your property and making offers to your creditors on your behalf.

*Caution – There are serious consequences involved in a PIA and by entering into a PIA with your creditors, you are committing an act of Bankruptcy. A PIA may be suitable if you do not qualify for a Debt Agreement, for example if your after-tax income is more than $88,547.55 or your divisible assets add up to more than $236,126.80. Further, some debts will not be released or included in a PIA and will still need to be repaid. Additionally, entering into a PIA will affect your ability to get credit and will appear on the NPII permanently.

If you are considering one of the above four formal insolvency options, it is important that you seek advice as to which option may be best suited to your individual circumstances.

Informal Insolvency options:

Information options that may assist in avoiding one of the four formal scenarios outlined above, include working with your professional advisors (such as an accountant or lawyer), to informally negotiate with your creditors. An experienced practitioner may be able to help you negotiate:

• More time to pay; Reduced payment amounts;
• Moratoriums or standstill agreements;
• Variations (or hardship variations) to your credit contracts;
• Lower interest rates; and/or
• Waiver of penalties.

While many people successfully negotiate with creditors themselves, there can be benefits in utilising a professional advisor. One not so subtle benefit of using a lawyer being that you are demonstrating to your creditors that you are seeking advice and that you are serious about reaching a resolution. Quite often, creditors respond more favourably to a letter coming from a lawyer, than for example an email sent from your personal account.

While creditors may seem sympathetic now, that position is likely to change, and change quickly in the coming months. It is therefore becoming increasingly important for individuals who are facing financial difficulties now, to properly inform themselves as to what their legal options are in dealing with their creditors.

Should you require assistance in reviewing your solvency position or would like to discuss what insolvency options may be best suited to your individual needs, please contact our office on 07 3009 8444.

In September 2019, our article – What is a director penalty notice and what does it mean for you as a director?, touched on when a director(s) may become personally liable for two types of tax debts of a limited company namely, Pay As You Go (PAYG) and Superannuation Guarantee Charge (SGC) liabilities.

(Below is a Director’s Penalty Notice 101 to get you up to speed with Director penalty notices before you read the update).

Director’s Penalty Notice 101 Infograhic

Fast forward to 2020, and the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 (the Bill) has been passed to include penalties for unpaid Goods and Services Tax (GST), Wine Equalisation Tax (WET) and Luxury Car Tax (LCT). The Bill provides that any assessed net amount or GST instalment will necessarily include any applicable LCT and WET.

The new provisions to include director penalties for GST apply from 1 April 2020.

So how does the Bill affect you under the Director Penalty Notice regime and what can you do about it?

1. SGC and PAYG (Pay As You Go) Liabilities

With respect to Super Guarantee Charge (SGC) liabilities, for a director penalty to be eligible to be remitted without payment, the unpaid amounts of superannuation must have been reported by lodgement of the SGC statement by the due date.

For the Pay As You Go amounts that a company must withhold from wage payments made to employees for remission to the ATO (Australian Tax Office), the PAYG withholding must be reported within 3 months of the due date for a director penalty to be eligible to be remitted without payment.

If the SGC statement was not reported by the due date, or the PAYG withholding was not reported within 3 months of the due date, the ATO can issue a ‘lockdown’ Director Penalty Notice and a director can only avoid liability under the DPN (Director Penalty Notice) by arranging for those liabilities to be paid. Appointing a liquidator or voluntary administrator to a company will not avoid liability for lockdown Director Penalty Notice amounts, and the ATO can:

• Issue lockdown DPNs after a company is placed in liquidation or voluntary administration; and
• If necessary, base lockdown DPNs on estimates of a company’s superannuation or PAYG liability.

However, if the SGC was reported by the due date and the PAYG withholding was reported within 3 months of the due date, then a director can avoid personal liability by appointing a liquidator or voluntary administrator to a company. This must be done either before a DPN is issued or within 21 days of the date of the DPN.

2. (Goods and Services Tax) GST Liabilities

With respect to GST liabilities, if a company has failed to pay Goods and Services Tax and also failed to lodge its Business Activity Statements (BAS) within three months of being due, the directors will automatically become personally liable for unpaid GST. Accordingly, the ATO (Australian Tax Office) may issue a lockdown Director Penalty Notice for the Goods and Services Tax liability.

However, if a director is in the position where:

1. the company has failed to pay GST (Goods and Services Tax);
2. the ATO has issued a 21 day Director Penalty Notice; but
3. the company lodged its BAS within three months of the due date,

the director will have 21 days from the date of the notice to exercise one of three options to avoid personal liability. The options are:

1. paying the GST to the ATO;
2. placing the company into liquidation; or
3. placing the company in voluntary administration.

Exercising one of the above options within 21 days will allow a director to avoid personal liability and the debt remains with the company.

What you should watch out for

Ideally, to avoid DPN liability, a company or its director(s) must pay PAYG, superannuation, GST, Wine Equalisation Tax and LCT liabilities on time.

If you are a new director be wary that you can be made liable for historic GST, PAYG and SGC where these remain unpaid 30 days after your appointment. Therefore, when being newly appointed as a director, be careful to ensure you are not inheriting those liabilities.

Summary of notice periods to avoid liability

Coronavirus

In consideration of the current impacts of COVID-19 (Coronavirus), it is unclear whether the ATO will extend the due dates discussed above.

However, the Coronavirus Economic Response Package Omnibus Bill 2020, now Act No 22 of 2020 following its assent on 24 March 2020, may exempt those affected by COVID-19 from these obligations.

Schedule 8 of the Coronavirus Economic Response Package Omnibus Bill 2020 provides flexibility by establishing temporary means through which individuals who are unable to meet their obligations under the Corporations Act or the Corporations Regulations (due to COVID-19) can access regulatory relief for a maximum of six months. In particular, the Treasurer may determine:
• Exemptions from obligations; and
• Modifications of obligations to enable compliance.

As the Coronavirus situation continues to rapidly evolve, the aforesaid due dates may be subject to change, notwithstanding the new Coronavirus legislation. As always, we will continue to keep you updated. If you require any further information on this in the meantime, do not hesitate to contact us.

A Deed of Company Arrangement, or DOCA, is an arrangement between a company that has entered into administration and the company’s creditors.

DOCAs are a form of company restructuring provided for under Part 5.3A of the Corporations Act 2001 (Cth) (“the Act”) the other alternatives being liquidation and returning the company to the directors.

DOCA – The Administration Process

Phase 1 – Appointment of a voluntary administrator

A decision to appoint a voluntary administrator for a company is made by either:

• The directors (by resolution of the board and in writing); or
• A secured creditor (with a security interest in all or substantially all of the company’s property); or
• A liquidator/provisional liquidator.

The period of voluntary administration commences on the appointment of the voluntary administrator.

Phase 2 – 1st Meeting of Creditors
The voluntary administration must convene the first meeting of creditors within eight (8) business days of being appointed (unless the court allows for an extension of time).
At least five business days’ notice of the meeting must be given to creditors.
Creditors are entitled to vote at this meeting to:

• Replace the administrator
  Where a creditor intends to replace the administrator, they must approach a registered liquidator before the meeting and get a written consent from that person that they would be prepared to act as voluntary administrator.

• Create a committee of inspection
  Creditors may elect members to same to assist and advise the voluntary administrator, monitor the voluntary administrator, approve certain steps in the administration, and give directions to same. Note: the voluntary administrator must have regard to but is not always required to comply with such directions.

Phase 3- Investigation and Report
The voluntary administrator investigates and reports to creditors on alternatives.

Phase 4 – 2nd Creditors Meeting
The 2nd creditors meeting must be convened within 25 business days after being appointed (or 30 business days were the appointment is around Christmas/Easter), unless the court allows an extension of time.
At least five business days’ notice of the meeting must be provided to creditors.
Creditors are entitled to vote at this meeting to:

1. Return the company to the control of the directors
2. Accept a Deed of Company arrangement.
   Note: the DOCA must be signed by the company within 15 business days following the meeting unless the court allows for an extension of time
3. Place the company into liquidation effective immediately. (Administrator becomes company liquidator).

Deeds of Company Arrangement

DOCAs are conceived as a flexible, simple, and expedient scheme of arrangement and is regarded as the most common mechanism for company restructuring of distressed entities.

What is a holding DOCA?

A “holding DOCA” is not a term provided for in the Act, however the Australian Securities and Investment Commission – Regulatory Guide 82 provides the following description of a Holding DOCA (Deed Of Company Arrangement):

“holding DOCAs are typically used as a means of providing more time for a voluntary administrator (or the directors or third parties) to develop proposals for restructuring or otherwise resuscitating the company, thereby avoiding the need for the voluntary administrator to seek an extension from the court of the convening period for the second creditors’ meeting under s439A. Typically, holding DOCAs do not contain any concrete provisions on the future of the company or any immediate benefits for creditors”

What are the benefits of a Holding DOCA?

Holding DOCAs can be an effective tool for companies facing solvency difficulties to deal with creditors while avoiding the hardships of liquidation. Key benefits include:

The terms of a holding DOCA can be highly flexible.

• Holding DOCAs may provide for a successful restoration of a company to solvency;
• The holding DOCA may enable the company’s business to continue from which suppliers may benefit;
• It may provide a greater return to creditors than if the company is wound up; and
• The restructuring of the company’s debts may result in higher return to unsecured creditors.

Are “Holding DOCAs” valid?

While holding DOCAs are not a long-term solution to an organisation’s solvency issues, they can be an effective and valid means to allowing a company to avoid liquidation.

Case example: Mighty River International Limited v Hughes and anor (as deed administrators of Mesa Minerals Ltd)

In this matter, the High Court considered the validity of holding DOCAs as a means to continuing an administration. Ultimately, the Court determined that the use of a ‘holding’ DOCA could be valid in certain circumstances.

Background:
Mesa Minerals Limited (subject to deed of company arrangement) (“Mesa”) is a listed mining company. Mighty River International Limited (“Mighty River”) was a shareholder and a creditor of Mesa.

The directors of Mesa entered into a resolution to appoint voluntary administrators (“Vas”) to Mesa. The VAs subsequently issued a report to creditors under s 439A of the Act which recommended that is was not in the best interests of creditors to end administrator or to enter the company into liquidation.

The VAs recommended that creditors resolve to execute a DOCA which:

• did not exclude the possibility of winding up Mesa in the future where this arrangement is ultimately determined to be in creditors’ best interests; and
• allowed the VAs an opportunity to explore a restructuring and/or recapitalisation of Mesa which may provide a more beneficial outcome for creditors as opposed to an immediate winding up.

Terms of the Holding DOCA

A DOCA was entered into which contained terms providing as follows:

• An ongoing moratorium on creditors’ claims during which no creditors could pursue claims against Mesa.
• Contemplated that VAs would further investigate any claims that Mesa had against third parties; and seek proposals for restructuring with a view to having Mesa’s shares continue trading on the ASX (with report on possible variations to the company structure to be provided to creditors within six months).
• Subject to variation of the DOCA, there would be no property available for distribution to creditors.

Challenge to Validity of Terms of the Deed Of Company Arrangement (DOCA)

Mighty River challenged the DOCA on the following three grounds:

1. The terms of the DOCA were contrary to the objective and provisions of Part 5.3A of the Act specifically by aiming to circumvent the requirement in s439A(6) for a Court order to extend the period during which the second creditors’ meeting must be convened.
2. The DOCA failed to identity property available for distribution to creditors contrary to the provisions under s444A(4) of the Act.
3. The DOCA was void since the VAs failed to form the opinion required by s438A(b) of the Act being that the DOCA was in the best interest of company creditors (and the then existing provisions of s439A(4) accompanying reports and statements to set out required opinion – now repealed provision).

The decIsion
While their Honours disapproved of the term ‘holding’ DOCA since the term does not appear in the Act and obscures proper analysis of the terms for validity, they nonetheless held the ‘holding’ DOCA was properly constituted and valid under Part 5.3A of the Act and fulfilled the formal requirements of same.

Their Honours also found that an instrument conferring and creating genuine rights and duties is permitted to incidentally extend time for VAs investigations pending a subsequent variation to the DOCA.
It was also held that the moratorium on creditors’ claims was not contrary to the objectives of the Act since:

1. The DOCA increased the chance for company survival or otherwise provided a greater return to creditors than one that would result from the immediate liquidation of the company.
2. Preceding the enactment of Part 5.3A of the Act, moratorium-only schemes of arrangement were considered valid and by consideration of the purpose of DOCAs (intended to provide greater flexibility to management of company affairs) DOCAs with similar moratorium terms were also permissible.
3. The interests of creditors are not compromised by extending the prescribed period of time within which the administrator is to convene a meeting of creditors to make decisions about the affairs of a company

With respect to the failure to specify any property for distribution to creditors, it was held that s 444A(4)(b) of the Act required a DOCA to specify the property, if any, to be available to pay creditors’ claims and that the intended flexibility of DOCAs would be undermined should the provision for distribution of property (even of nominal value) be required.
The Court also noted that there are numerous examples of DOCAs that involve no property of the company being made available for distribution, yet they continue to be consistent with the intended flexibility of approach to DOCAs. Such examples include:

1. A deed of company arrangement may provide for a debt for equity swap.
2. Creditors’ claims may be replaced with rights as beneficiaries of a creditors’ trust, with the trust funded by third parties.
3. Shares transfers may bolster a DOCA where shares of the company’s members are transferred to creditors.
4. The inclusion of a deed of moratorium, which allows the company to trade out of solvency difficulties.

Ultimately, the ‘holding’ DOCA was upheld as valid.

How can we help?
If you are a company director or major creditor of a company suffering solvency issues, you may be able to access the benefits of a holding DOCA for the short term operation and administration of your organisation.

Contact our Insolvency team today to discuss your options.

ACT NOW and ACT FAST and contact us on
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07 3009 8444
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