A practical guide for companies in the era of COVID-1931 March 2020 Authored by: David Lee Lewes | Topics: Corporate and commercial, Compliance and corporate governance, Agribusiness, Banking and financial services, Competition and consumer law, Energy and resources, Litigation and dispute resolution, Mergers and acquisitions, Family business, Insolvency and restructuring, Personal Property Securities, COVID-19
Coronavirus is having huge impacts on the global and Australian economies. This article provides some practical guidance for businesses in the era of COVID-19.
Like the rest of the global community, Australian businesses have been massively disrupted by changes implemented by governments to control the spread of COVID-19.
State and federal governments have acted quickly to bring about very significant and wide ranging changes to the way that businesses can operate, often taking effect almost immediately, and requiring very fast adaptation and reaction from business.
This article aims to provide practical advice to businesses facing COVID-19 related challenges.
Surviving the outbreak
If you are struggling under the weight of your contractual obligations during the pandemic, force majeure clauses, the doctrine of ‘frustration’ and the Australian Consumer Law may offer some relief.
A force majeure clause offers relief to the parties of a contract when unforeseeable circumstances arise that prevent the performance of obligations under the contract. For force majeure to operate, it must be included in the terms of the contract and must be drafted so that the clause covers the intervening event relevant to the performance of the contractual obligations. If you want to rely on a force majeure clause, check your agreements to see if a clause is present and what it might cover.
Once you have ascertained what is covered under a force majeure clause, you need to analyse what the consequence of the clause being triggered is. Agreements will commonly provide a number of alternative consequences to a force majeure event:
- One or more parties may have the right to terminate if the event continues for a certain period.
- No party may have the right to terminate, but the parties will not be required to comply with obligations that are impacted by the force majeure (without any time limit being imposed).
The latter example is difficult to manage for parties as there is then generally a degree of uncertainty about whether a term providing a termination right could be implied into the contract, or whether the obligations of the parties are simply to be suspended indefinitely.
The doctrine of frustration can operate to discharge a contract when an event occurs that makes the performance of the contract impossible or radically different. It has traditionally been very difficult to establish that frustration of a contract has occurred. However, courts have previously accepted that a change in the law that renders the subject matter of a contract illegal may be grounds for frustration. This may offer some hope to businesses that are suffering as a result of being ordered to close by state or federal governments. Note that frustration generally only operates when there isn’t a term in the contract to deal with the risks associated with an intervening event (like force majeure). Further, frustration will generally not be available where an event has made performance of a contract more difficult or costly, rather than impossible or radically different.
Consumer law may operate to imply terms into contracts, the breach of which may enable the termination of the contract. For example, the Australian Consumer Law guarantees that certain services will be provided within a reasonable time (when no time is set). COVID-19 may lead to delays in the delivery of services. The recipient of the services may be entitled to terminate the contract in these circumstances. Other Australian Consumer Law ‘consumer guarantees’ include that services must be provided:
- with due care and skill
- fit for any specified purpose.
We recommend that you seek professional advice before trying to terminate a contract based on force majeure, frustration or the Australian Consumer Law. Each case depends on the terms of the contract and individual circumstances. If you wrongly refuse to perform your contractual obligations or incorrectly terminate the contract, the other side may take advantage of this and seek damages against you for repudiation.
What about employees?
An employer is not required to pay an employee in circumstances where the Commonwealth or a State Government makes an order or direction that prevents an employee from working. This might occur when a workplace is closed as part of a targeted industry to stop the spread of COVID-19. It also applies when an employee is required to self-isolate. However, the employee may use paid leave entitlements in these circumstances.
If an employee cannot work because they need to care for a child whose school has closed, they may be required to use paid carer’s leave entitlements to be paid for their absence.
The Fair Work Ombudsman’s website contains further information regarding coronavirus and Australian workplace laws.
Executing documents and powers of attorney
With social isolation and quarantine coming into effect across the country, many businesses are turning to electronic execution for legal documents. Counterparties will often have quite different approaches to electronic document execution and sometimes will be reluctant to accept it. To streamline execution acceptance, we suggest that companies consider implementing powers of attorney for document execution. Having powers of attorney enable the company to delegate powers to specific people (or to people holding specific positions within the company). This can streamline the execution process considerably and provide counterparties with clear evidence of authority and delegation. Legal advice is recommended for companies looking to establish powers of attorney. There are strict legal requirements concerning the form and execution of powers of attorney depending on the state and territory, particularly when dealing with land. The company’s constitution must also permit the delegation of authority.
Are your security interests registered?
There is a heightened risk of insolvency occurring in respect of all businesses over the next six months. If you are lending money, trading on retention-of-title terms, leasing goods or taking security over personal property in any way, it has never been more important to ensure that you have correctly registered security interests on the Personal Property Securities Register.
There may be a small window to act. The Corporations Act provides that a security interest that is registered in respect of a corporation more than 20 days after the security interest is perfected will vest in the company on winding up or administration. Even less time may apply for certain security interests. An out-of-time security interest that is registered today will only be enforceable if the grantor-company survives the next six months.
We recommend that you act quickly to register any unregistered security interests.
You can still enforce security interests and guarantees
Notwithstanding the Federal Government’s amendments to insolvency laws, parties can still enforce security interests and personal guarantees.
Personal guarantees may be more difficult to enforce due to the effect that the pandemic is having on the courts around the country – though, theoretically, nothing is stopping the enforcement of a guarantee. Security interests under the
Personal Property Securities Act 2009 (Cth) (PPSA), on the other hand, do not require a judgement before a secured party can take enforcement action. The PPSA provides secured parties with powers of seizure and disposal. Of course there would be significant reputation risk around enforcement of securities under the current environment that would need to be carefully considered.
Relief from the Government
The Commonwealth Government has moved quickly to dampen the shock of COVID-19 on struggling businesses. As previously outlined by Cooper Grace Ward , the Treasurer is introducing a number of economic responses to coronavirus.
Changes to statutory demands
A statutory demand is a document issued to a debtor company requiring the debtor company to pay its debts within 21 days. Under normal circumstances, statutory demands can be issued when a debt is over $2,000. A debtor company is presumed to be insolvent if no action is taken by the debtor company within the 21-day period. The presumption of insolvency leaves the door open for the creditor company to seek a court order to wind up the debtor company.
The first action taken by the Federal Government is to:
- increase the minimum threshold for creditors issuing statutory demands from $2,000 to $20,000
- increase the response time from 21 days to six months.
These changes will apply for six months.
Personal liability relief for directors
An insolvent company is one that is unable to pay its debts when they fall due for payment. The Corporations Act provides various penalties for directors of companies that incur debts while the company is insolvent. This may include making directors personally liable for debts if a company trades while insolvent.
Given the economic uncertainty caused by the coronavirus and the dire personal consequences for company directors who permit companies to incur debts while insolvent, directors may be unwilling to trade through the impending financial hardship. Left unchecked, this could lead to otherwise profitable businesses having to liquidate throughout the COVID-19 crisis.
To this end, the Government has announced temporary relief from directors’ personal liability for trading while insolvent. Specifically, directors will be temporarily relieved of their duty to prevent insolvent trading concerning any debts incurred in the ordinary course of the company’s business. This will apply for six months.
Directors should note that egregious cases of dishonesty and fraud will be subject to criminal penalties. Further, the debts of the company will still be payable by the company. Lastly, the relief will only apply to debts incurred in the ordinary course of the company’s business.
Coronavirus shows no signs of slowing down and we expect that over the coming days and weeks there will be many new policy announcements from state and federal governments.
If you require assistance navigating the challenging environment arising from COVID-19, please don’t hesitate to contact Cooper Grace Ward.