As Australian businesses continue to grapple with reduced revenue and strategic uncertainty, boards should be alert to changing financial risks.
Coming on the heels of the devastating bushfires, COVID-19 has ensured 2020 will be one of Australia’s worst years for corporate failures. Virgin Australia was the first high-profile company to be grounded, going into voluntary administration on 21 April with a debt of $6.8b.
Businesses in the tourism, travel, events, hospitality and in-store retail sectors, professional sporting organisations and NFPs have been hit with precipitous falls in income as a result of the shutdown. The mood is better for financial services, health, online and digital-first businesses, according to Deloitte research.
Many businesses have grappled with the complexities of JobKeeper paperwork as they tried to bridge their cashflow gap. “There was an immediate surge in businesses seeking assistance in the initial weeks following social distancing measures being implemented,” says McGrathNicol partner Matthew Caddy. “As business activity returns, I anticipate an increasing number will seek assistance to restructure and reset their cost base for what is likely to be a period of medium-term reduced demand. Those unable to adapt could face insurmountable liquidity constraints.”
The federal government’s temporary safe harbour provisions have provided company officers and directors with breathing space. Directors should treat this temporary relief for financially distressed businesses in the same way they would deal with it if they were facing personal liability down the track, says Michael Sloan, a partner in Ashurst’s restructuring, insolvency and special situations practice.
“They should be making plans, negotiating and being careful about capital and expenditure,” he says. “It’s also important for directors to realise their duty shifts from shareholders to creditors when they are in a situation of insolvency or near-insolvency.”
Michael Herron, national head of professional and financial risks with insurance and risk management consultancy Gallagher, says the COVID-19 disruption creates shocks that provide the perfect environment for class actions. With elevated legal risk and rising D&O insurance expenses, directors need to pay close attention to the fine print on insurance and ensure they do due diligence. “In this environment, there is enormous uncertainty for directors,” he says.
See our class actions update here.
A recent AICD webinar explored the insolvency reality facing many businesses or their stakeholders and how to minimise its consequences. Access the recording here.