“Our entire economy shut down last year, as did most of the globe, and there wasn’t actually significant distress. That is not to say there wasn’t pain and people didn’t suffer, but one need only look at the historical low rate of formal insolvencies to see that any COVID-related distress has yet to play out in the economy,” he said.

“On one view the government, through noble intentions, overstimulated the economy last year to prevent wide spread insolvency and as a result many businesses that should have otherwise failed irrespective of COVID-19 are managing to survive.”

Amid ongoing snap lockdowns without 2020 levels of government support, Mr Edwards continued, “we are likely to see more pain over the next six months, and that is likely to continue for 18-24 months as it fully plays out”.

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Clayton Utz national practice leader of restructuring and insolvency Timothy Sackar (pictured, left), agreed, saying there is “no doubt” that the impact of COVID-19 will be felt for another six to 12 months.

“Apart from the fact we are unlikely to be completely free of any restrictions within that time, it is likely to take a full financial year (if not more) of improved trading conditions for most companies to be able to re-prove their pre-COVID business plans and business strategies. There will be a number of companies who will need financial concessions and waivers during this intervening period in order to keep trading,” he said.

Opportunities to restructure

Every cloud, Blackwattle Legal partner Trevor Withane (pictured, centre) said, has a silver lining. 

“All of the ordinary mechanisms for business restructuring continue to be available, along with the relatively new safe harbour regime and the small business restructuring regime. Use of voluntary administration and a ‘holding DOCA’ can help put a company on ice, and protect directors from personal liability and against enforcement of personal guarantees, while we emerge from the lockdown and out of the danger zone,” he listed.

“We often tell clients that if they are in financial difficulty, they should take action now – there is no shame in having to restructure or utilise one of the formal insolvency procedures because of financial distress caused by a global health crisis.”

As all players in the industry will know, Mr Withane continued, insolvency appointments are down (and have been throughout the pandemic) even on a normalised basis, fuelling speculation that there are many “zombie companies” out there.

“One might hypothesise that business owners in distress are deferring restructuring decisions because of the pandemic, and may even be betting on further government relief or a post-lockdown windfall,” he said.

“Early in the piece there was relief from liability for insolvent trading and other similar measures which have now ended, and we consider that there is limited political appetite for extending such measures. On that basis, we consider that deferring restructuring and insolvency decisions is a risk fraught strategy (or lack of strategy).”

With ongoing uncertainty – at least in the short to medium-term – there remains opportunity for businesses to restructure either informally or through a formal insolvency process, Mr Edwards said.

“There is still a lot of goodwill in the broader economy for good businesses that were otherwise hamstrung solely because of COVID-19, but this will only last for so long. One of the key issues that has yet to be dealt with by far too many businesses are the legacy debts of 2020 including deferred rent, deferred loan repayments and contractual amendments that will revert,” he said.

“These issues need to be resolved one way or another in order for a business to survive and grow. Dealing with these issues in a timely, proactive fashion is where the main opportunities will be.”

It is “worth making use of the crisis”, Mr Sackar surmised, to restructure your business.

“It will not be unexpected and most financiers or counterparties will have a level of patience to assist. A number of companies are already progressing their business restructures with aspirations of being in a stronger position as the financial landscape improves,” he said.

How to grasp opportunities

Borrowers and financiers, Mr Sackar detailed, should be exploring restructuring opportunities in their existing counterparty, loan or security documents.

“We have seen some borrowers use the pandemic to force their financiers into a restructuring to help strengthen their business. We have also seen some opportunistic financiers or investors use the crisis to better their position with a borrower,” he said.

“Lawyers play an important role in helping facilitate these discussions and/or seeking out these opportunities in the relevant transaction documents.”

Business owners and directors in distress should seek legal advice before moving ahead with any restructuring and insolvency procedures, Mr Withane noted. 

“If directors have any concerns, they should retain their own solicitor, and seek advice in which the privilege will belong to them and not the company (so it can be asserted, for example, against any future controller of the company),” he said.

“Similarly, creditors – secured and unsecured – should speak to their lawyers before resorting to self-help debt collection. For example, a secured creditor might need to think through the strategy of recovering its debt, before running off to appoint a receiver (assuming the right arises).”

Supporting clients and in-house teams

Lawyers can best support clients and in-house teams, Mr Edwards suggested, by providing frank and clear advice.

“Proactive engagement with interested stakeholders such as secured lenders and key creditors will result in better outcomes than delayed engagement. Decisive decision making around what option to take – be it safe harbour or administration for example – allows the business time to sell the message to stakeholders and garner the required support to implement the restructure,” he advised.

A successful restructure, Mr Edwards explained, is “often as much about the story or rationale behind the restructure than the proposed return under the restructure itself”.

Being proactive in identifying issues that might exist for companies or directors, prior to the issue arising, is important, Mr Sackar added.

“We have also seen a range of new legislative changes or new ideas and proposals in the insolvency space in the last 12 months. Being across these developments will be important as advisers navigate restructuring in the next year,” he said.

Many businesses, Mr Withane noted, should give strong consideration to procedures like safe harbour and small business restructuring. 

“Those procedures are designed to avoid the bad outcomes that can result from doing nothing, or simply letting creditors drive the process (which could lead to winding up),” he said.

“Utilising such processes correctly will need assistance from a professional on both accounting/financial and legal fronts. People should be cautious about leaving the job of shielding them from legal liability to non-legal professionals (no matter how helpful and competent they may be in other capacities).”

Moreover, Mr Withane went on, lawyers “should tell their clients to speak to them at the first sign of financial concern and certainly once any plan is in contemplation”.

“I would advocate for specialist insolvency lawyers educating their corporate clients about the legal lifeboats out there – even if there is no obvious financial distress,” he said.

Further thoughts

One of the by-products of an overstimulated economy, and the fact that COVID-19 was not a liquidity crunch unlike the GFC, means there are plenty of options available for businesses to deal with their problems, Mr Edwards explained.

“This may include looking to refinance out existing lenders with one of the myriad of non-bank lenders in the market, undertaking a capital raise to deleverage the business or opportunistically acquire or indeed undertaking a sales process to sell assets or business lines for good value,” he said.

In times such as these, Mr Withane mused, – like in many aspects of life – it “pays to be proactive”.

“If people are waiting on the government, or just trying to tread water hoping their creditors take no adverse steps before things turn around, they could instead be guaranteeing the outcomes they are hoping to avoid,” he said.

“Being proactive also has the benefit of protecting against personal liability and ensuring that all the true ‘worst-case scenarios’ are taken off the table.”