Alf Pappalardo Ladies and gentlemen, my name is Alf Pappalardo. I'm the head of Allens' restructuring and insolvency team, and I am absolutely delighted to welcome you to our webinar on restructuring, insolvency and COVID-19: 'where are we, and where are we heading?'
So before we get started with the presenters, I'll go through some housekeeping bits and bobs, so just bear with me. The first point is that there's a question and answer box, which hopefully is coming up on your screen somewhere. So we're really encouraging you to send the questions. The harder the better if I'm not answering them, and I'll address them at the end of the speakers and throw them to the relevant person to answer. So, please, we encourage you to send us any questions you like.
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And then, finally, after the webinar has finished and after we've taken questions and answers, each of you will get an email from us with a link to our webinar page so you can continue to watch this presentation over and over again; we expect it to be a bestseller, more popular than the Michael Jordan documentary. So feel free to show it to all your friends and family tonight.
So I might quickly turn to what we're looking at today. We're going to, first of all – and, hopefully, this is up on your screen – look at market observations in terms of what's happening in the front end of the actual market at the moment. Then we'll look at the new legal landscape, which I'll touch on a bit more in a second. We'll talk through the restructuring toolbox and what options are available to all of you and all of us in terms of options for restructuring at the moment. And then we'll have a little bit of a restructuring observation as to where we are at present and where we're going.
So to set the scene quickly, I've been doing this stuff for 30 years, and I know I look a lot younger than that. If you had said to me six months ago that there would be an event which would effectively shut down a vast proportion of our economy, which would cause the Federal Government to effectively do away with insolvent trading and the ability to wind up companies for a certain period, which would give directors all sorts of exclusions from disclosure in terms of market revelations, which would mean that tenants effectively didn't have to pay rent, or at least most of the rent for at least six months, and which would effectively mean that retail banks – and I know a lot of you are the retail banks – would stop being pariahs of the market, as they were after the Hayne Commission Report, and suddenly become the foundations of Team Australia, which is actually helping to save the economy, I would have said you're insane. So it's a remarkable time. Remarkable things have been happening and I'm absolutely delighted to throw to the first speaker, who is Warwick Newell from our Melbourne office. So, Warwick, over to you.
Warwick Newell Thanks, Alf. Hello, everyone. Yeah, look, it's hard to believe, isn't it, that we've only been doing this now for sort of three months and I've only been home‑schooling my kids for about eight weeks. Believe me, it feels certainly much longer in that particular case. There's been a lot that's happening at the front end of the debt markets and, obviously, the facts to report; I'll take five minutes just quickly giving you a rundown of what we've observed on that front.
But before I do so, just sort of thinking back, we have to try and recall the scene here where we were all placed three months ago, and it was only March, I think, probably, when we all sort of started thinking about the economic impact of COVID and the health impact of COVID. There was an incredible level of uncertainty in the market as to what this was all going to look like and play out for us here in Australia. And at the front end of the debt market, back then, in sort of March, the first thing that boards were thinking about, and quite rightly, was liquidity. They had no visibility as to how long we were going to be in this. They had to ensure they were able to meet their debts and pay their debts and they had the ability to do so. And so what boards of corporates across all sectors virtually did, not just those that have been directly impacted but those that were on the periphery of that impact, they sought to shore up the debt components in the balance sheet.
They did that in a couple of different ways. One was seeking extensions to existing credit arrangements, so that they had comfort that they were sitting there with terms on their existing debt. And secondly, they were looking, and quite often looking, for additional debt, additional liquidity, maybe a short-term liquidity facility or some sort of extension of their working capital lines to provide them with additional capacity to ride out that storm. And what they did was, they went to the relationship lenders and relationship banks for that support. And what do we see from the banks? Well, as Alf already has alluded to, we've seen virtually across every credit that we've been involved with over the last number of months, a very, very high level of support being provided to those borrowers across all sectors by the Australian banks and by other credit providers in the market. From whether that's deferring interest payments on lines to small businesses and home lenders – sorry, home owners impacted by COVID – through to big corporates and big employers at the top end of town, that support has been there.
And it's been a difficult ask for lenders in a number of circumstances. I mean, we've been involved in a number of circumstances where lenders have been asked to extend additional credit, substantive amounts of additional credit to lenders that were not trading, could not provide a set of projections, could not give the lenders any comfort as to when they were going to start having revenues again of any significance, and effectively going cap‑in‑hand to their lender base and saying, 'We need you to support us through this time'. And as I mentioned, the lenders have been doing that. So for an industry that traditionally bases itself on a bunch of metrics, predictions, risk assessments in determining price and whether credit should be extended, the level of flexibility has been extraordinary. So what has that looked like by way of activity at the front end? Well, as mentioned, short-term liquidity facilities and extensions have really been the name of the game. There's been a lot of those that we've been involved with, and we are virtually across the market. That's been the focus of banks.
There have also been a number of creditors that have been forced to seek financial covenant waivers or waivers of other defaults that may subsist under their banking documents for reasons that are COVID‑related. Cessation of business is a good example. A number of finance documents in the market have a default that triggers if you cease to trade. And, of course, a number of credits and a number of industries have done exactly that. There have been many conditions that have been potentially breached, credit dealing conditions, etc. And so, various creditors have had to go to market, had to go to their lenders to obtain waivers of those defaults. And initially we also saw a number of examples of creditors drawing long, so effectively utilising or drawing down their working capital lines fully and putting that cash in bank accounts to ensure they had a cash balance there to meet expenses as they fell due.
So where to from here in the front-end debt markets? Well, look – it's different from the GFC, in the sense that the liquidity continues to be available there in the market for the right creditors and the right transactions. And so, good companies and creditors will continue to attract support from lenders in the usual course. And we are seeing that at the front end on deals currently. And that liquidity, not just bank debt, we're also seeing that liquidity being available in certain offshore debt markets that seem to be coming back, too, which is also great. At the other end of the spectrum, with borrowers that are struggling a little and will continue to struggle even as we move out of a post‑COVID world, it's worth noting that lenders are likely to start reverting to more traditional measures in assessing credit, whether it's providing additional credit or extending terms. And so for the second half of calendar 2020 it's going to be really important for borrowers to be able to demonstrate that they've got a viable path forward. Before we delve into the issues that may face borrowers who can't do that, I'll pass across now to my partner in the M&A team, Kate Towey, who can describe that position on the front end from an equity and regulated perspective.
Kate Towey Thanks, Warwick, and good afternoon, everybody. So just to set the scene, I just wanted to give you a quick overview of what we've been seeing in the corporate and equity capital markets space, both in terms of activity and regulation. And there has been quite a lot that's happened in terms of relief that's been provided and modifications, but I'll just touch on a couple of things.
Firstly, in terms of activity amongst our corporate clients, when this hit in March, the initial and the most immediate concern around the restrictions and the economic fallout was how to deal with the significant uncertainty that companies were facing as to what the financial impact would look like on their business operations, their revenue and their cash flow. So one of the first things that we were doing with clients in March was helping them to grapple with their disclosure obligations in an environment where they had no means of adequately assessing the effect that this would have. Because although the COVID situation gave rise to numerous market-sensitive issues around material contracts, employees, etc, really the most common disclosure issues were the impacts on earnings guidance and on debt arrangements, which Warwick has touched on. So at that time, particularly in March, corporates had to very quickly reassess any earnings guidance they'd already provided to the market prior to this period, through the lens of this new business and consumer sentiment environment that we found ourselves in. And so we saw a significant number of listed entities withdraw or suspend their earnings and distribution guidance at that time. And that was very much supported by ASX, who encouraged companies to look at guidance and reassess it in that context.
Also, at that point in time in the market, as Warwick mentioned, companies and businesses were heavily focused on their cashflow and liquidity position. So, as Warwick said, we saw them extending and drawing down on debt facilities and they were also focused on cutting costs, so focusing on workforce leases, other material contracts. But something in particular that we were seeing and working with clients on was in relation to their ability to either cancel or defer dividends and distributions to give themselves that breathing space.
But probably the most significant and the greatest activity we've seen has been in the equity capital markets. So, since early April, there's been a huge amount of activity, with entities going to market to raise additional capital to bolster their balance sheets, and this is still continuing. Only this week, Vicinity launched its placement and SPP. The total amount that has been raised in the equity capital markets since the end of March is approaching $20 billion and that needs to be considered in the context of the fact that for the whole of 2019, $36 billion of equity was raised. So we're in a whole new world. The capital raisings have been placements with either an SPP or an ANREO, an accelerated non‑renounced entitlement offer, to allow retail investors to participate. So we've been spending a lot of time with clients there.
Turning to the regulatory side, as I said, there have been numerous modifications and relief, but supporting this ECM activity was a temporary listing rule waiver provided by ASX at the end of March, which applies until 31 July, to allow companies to raise up to 25% of issued capital without shareholder approval or relying on other exceptions, replacing the regular 15% cap. There are some conditions that apply to that, that focus on the opportunity for retail security holders to participate in disclosure around allocation policy that has really driven what we've seen, helped to drive the volume that we've seen in the equity capital markets. The other quick thing to note in terms of regulatory relief, if you like, is the Treasurer's announcement last week about some temporary relief from continuous disclosure obligations.
Now, this has been brought in to enable listed companies to more confidently provide earnings guidance and other forward-looking statements after we saw that withdrawal of guidance back in March, and the changes are designed to make it harder for ASIC and third parties to bring claims alleging a failure to disclose information. So it's really aimed at trying to reduce the class action risk in this period of time by modifying the test in the civil penalty provisions in the Courts Act. It's been welcomed by directors, but I think we need to take it cautiously because there are, in the main, a number of classical reasons why disclosing entities and their directors need to not change their practices and policies around continuous disclosure. The modifications don't apply to other markets as conduct rules, including misleading and deceptive conduct, and they don't modify the standard for criminal offences. So while it has introduced an additional hurdle for class action claims, we are recommending that our clients be cautious around that. So that gives a bit of breathing space. But what I'm going to do is hand over to Tania Cini, our restructuring and insolvency partner, to talk about additional law reform around insolvent trading during this time.
Tania Cini Thanks very much, Kate. And good afternoon, everyone. What's popped up on the slide there are some of the key law reforms that have come through to assist companies weather the COVID storm. And I'm sure that many of you will be very familiar with most of those by now. So I won't go through them in detail, although I will touch on, in a little more detail, shortly, some further commentary around the insolvent trading relief provisions that we've seen. So, you know, overall, that suite of legislative change, I think, has been a very effective set of measures to stabilise businesses, while COVID unfolds. When COVID first hit we were inundated with directors concerned about insolvency and concerned about their exposure under the insolvent trading provisions. And certainly the combination of the legislative changes and the various liquidity support schemes have provided some very useful immediate relief for companies and their directors. They have certainly avoided premature and potentially unnecessary administrations, which, you know, would obviously have come with value destruction and further disruption to the market.
The other thing that I think the insolvent trading relief has done has allowed boards time to allow the impact of COVID to play out, at least to some extent, as Warwick mentioned; sort of trying to produce a forecast early on was virtually impossible. But, and you know, there's still a lot of uncertainty out there as to what the recovery looks like. I heard one commentator last week talking about the debate about whether the recovery is V shaped or U shaped or W shaped, and she said, 'Well, actually, I think it's question-mark shaped,' and, you know, I think that's exactly right. Nobody really knows what this is going to look like. And, you know, but I think enough time has passed, and with that insolvent trading release, directors have had the benefit of forecasting and developing turn‑around plans, so now it is a little bit easier than it was at the outset of the COVID crisis; I think the insolvent trading relief has provided a really important measure to allow that process to occur in a more orderly fashion than would otherwise have been the case with the initial scramble that we saw when COVID first hit.
And, of course, we know that many of these relief packages and legislative changes are coming to an end in September, unless, of course, they're extended, and there is talk of that, including whether perhaps there should be some more of a phased out – phasing out process for some of the reforms. And we'll keep an eye on that. But at this stage, we're looking at September and so I think now is the time for people to be turning to the more traditional restructuring techniques and protections, including, you know, formal safe harbour plans, if that's appropriate in particular cases, or in other cases, potentially sort of strategic voluntary administrations and other insolvency regimes. We're certainly encouraging our clients to start looking, if they haven't already, and, of course, many of them have, at what they need post‑September to start that planning process now and, of course, if our clients are landlords or suppliers or lenders to businesses, we're asking them to think about how they might be part of the solution that companies and businesses are looking for.
As I said, I just wanted to touch a little more on the insolvent trading relief. As many of you will know, it provides blanket protection for debts incurred in the six months up to 24 September, provided the debt is incurred in the ordinary course of business. And there's been a lot of commentary around, well, what does ordinary course of business mean? And some have said, well, by definition, if a company's insolvent and it's incurring a debt, that's not in the ordinary course of business. We certainly think that view undermines the whole purpose of the relief provisions. And the reality is there's a whole lot of businesses out there at the moment who are technically insolvent and that are incurring debt, and so I think that's what the legislation was directed at addressing. And I think that the view we have taken is that if the debt is incurred in furtherance of the continuation of the business, and there's an expectation about that continuation, then the debt, even if it's unusual, or exceptional in nature, it should still attract the relief.
So, you know, it's all a bit hard navigating all of that, and we are sort of three months out from when this relief ends. So we're sort of asking directors to start thinking about what the position of the company looks like post‑September now, rather than waiting until the relief hits, because, you know, although it's been a useful measure, it's not a free pass for directors. If it becomes increasingly clear that the company won't survive COVID, that the directors can't see a path to insolvent trading at some point beyond the six-month relief period, then the debts that are being incurred now are much less likely to be regarded as being incurred in the ordinary course of business.
And we've also seen commentary around the general duties of directors where obviously they still apply; quite apart from the insolvent trading provisions, directors must act in the best interests of the company. When a company is nearing insolvency, that means acting in the best interests of the company, taking into account the interests of creditors as a whole. And so if there's no prospect of a solvent outcome, and debts are continuing to be incurred and potentially diminishing the position of existing creditors, that could certainly be a breach of directors' duties. So again, I think it's not a matter of waiting until the 24th of September when the insolvent trading relief ends; it's critical for companies to be examining now whether the business has a realistic future and what that looks like and what levels of support from landlords, suppliers, lenders, etc, is required to weather the remainder of the storm.
In wrapping up, I just wanted to mention briefly, in terms of law reform, the Law Council of Australia has done some great work, including through the efforts of our very own Matt Whittle, in identifying further reform that might be useful. And there's a very detailed submission on the Law Council website, which addresses a whole range of issues, including, for example, amendments to the existing safe harbour provisions, issues around how the voidable transaction provisions, preferences and the like, how they should operate in the post-COVID world. So I'd encourage you to take a look at that if you have an interest in law reform in the insolvency space. So, given the short time we have, I'll leave it there but am happy to take questions later, and I'll pass on to Kim Reid of our Sydney office, who's going to be talking about contractual performance in a COVID context.
Kim Reid Thanks very much, Tania. As Tania has said, there's been a huge amount of law reform to deal with COVID but, at the other end of the spectrum, over the last few months, we've spent a great deal of time looking at old and rarely used contractual remedies and also at provisions which, until now, have largely been perceived as boilerplate in contracts because, obviously, contracts are critical to the cash flow of borrowers and their customers and suppliers, and so lenders and borrowers have been very interested in actual performance and remedies in this environment. So we've seen a lot of these in the last couple of months across a wide range of sectors in aviation, entertainment, oil and gas. These issues really cover the field, regardless of the sector we're looking at.
Firstly, we've been looking at whether you can rely on COVID to avoid performance under a contract and the answer is yes if the contract contains a force majeure clause that works, and force majeure literally refers to a greater force operating on a contract and it can excuse – or, at least, partially excuse – contractual performance while the relevant event is in place. So on the boilerplate, you will have seen force majeure clauses referring to lock outs and strikes and industrial action and, for present purposes, pandemics or epidemics. Now, sometimes these clauses are read as operating as a code and so, if pandemic or epidemic is not referred to in your clause, then you may not have an entitlement to relief unless there's a catch‑all along the lines of events outside the control of the parties, which may well capture COVID. So some of these clauses clearly work. Others are very pointed in excusing contractual performance except for obligations to pay money. And a lot of the debates we've seen have included, you know, attempts to slip a COVID-19 argument into a force majeure clause that covers the field, and also whether there's been a relevant connection between the current events and the clause. And so, for example, you know, at the outset when there was uncertainty about moves that the Government would be making with respect to lockdown laws there were questions about what regulation has effectively intervened in a contract.
Now, as we come towards the back end of the lockdown, the exercise of governmental power remains very important. We're seeing jurisdictions winding back their lockdown laws and so what that means is we're seeing moving pieces that need to be considered when you're invoking a force majeure clause or contesting it. There's no such thing as implied force majeure in this country. It can be implied in other jurisdictions, like China, so you do need to look at the governing law of the contract there as well. So in terms of practical steps, there are notice requirements. You need to look very carefully at the trigger events, as I've said, to show a causal nexus between the current circumstances and the impact on the underlying business. And you also need to be aware of the obligation to mitigate because the terms of these force majeure provisions may require you to show evidence that that you've taken steps to avoid the relevant loss.
Outside of the force majeure concept, we've also been looking at the old English concept of frustration of contracts. So there might be a right to terminate a contract based on the doctrine of frustration, which is where a contract can be brought to an end when any intervening event has occurred through no fault of the parties, which makes the contractual obligation impossible to perform or transforms a contractual obligation into a fundamentally different obligation. And so courts have over time found that frustration has arisen in a range of ways; a fundamental change in the basis of the contract, when the contract can no longer proceed as envisaged, most relevantly for now, through supervening impossibility through government interference or regulation. And an example of that, obviously, is the ban on large gatherings of people. And also changes in law rendering performance illegal. But, of course, in terminating a contract or alleging frustration, you need to be very careful. It's a high-stakes strategy to allege that a contract has been brought to an end, because if you're wrong about that, you're at risk of having repudiated the contract yourself. And so they are the sorts of issues we're looking at for banks, for borrowers and for a range of contractual counterparties and suppliers. And, really, the key takeaway is those moving parts of the puzzle; as laws change, they need to be examined very carefully to determine you've got an entitlement to relief and the contract.
So, with that, we'll change tack and I'll throw to Chris Prestwich, who is a partner in our Sydney insolvency team and will be talking about restructuring issues.
Chris Prestwich I'm having some camera trouble, so might go straight to Charmaine instead of us, okay. I'm trying to resolve it.
Kim Reid That's working, Chris.
Chris Prestwich Can you see me?
Kim Reid Yep, you're fine, Chris.
Chris Prestwich Okay. So the last time, the typical pattern that we saw was borrowers defaulting, lenders enforcing their security and going through a receivership process. This coming cycle, I think, is going to be very different. Directors have a lot more leeway to continue trading with a safe harbour protections in place to look to implement a solvent restructure. Post campaign, I think, banks are going to be, continue to be, much more reluctant to enforce their security and put receivers in, so they'll be looking at sitting back and delaying a voluntary administration process to play through. There's no framework but there's going to be plenty of opportunities for interested parties to come in and restructure and recapitalise entities. I think there'll be a lot more acceptance in the market of the need for that restructure to occur through an insolvency process. That's probably just a function of the climate we're in but also the ipso facto law reforms providing a bit more protection and value preservation. And I think, also, there'll just be a broad-based acceptance that, as a result of the last few months, entities simply need to go through an insolvency process to cleanse themselves of all of the debts and reset the balance sheet. It's also a market where there's still plenty of capital looking for the right opportunities, and often the cheapest and the surest way to acquire a distressed company is to buy up the debt from the existing lenders, and then look to implement a debt for equity swap, so there'll be a number of parties out there in the market looking for those opportunities.
So what are the restructuring tools that are available for parties looking to implement those transactions? Often the best restructures are still those that can be done consensually. Some things go on outside of a formal insolvency process; just a solvent, consensual deal is still going to be the preferred mechanism if everyone can agree. Often, people cannot agree, though, and it becomes necessary to implement, to force the restructure through against the wishes of a minority. And the two main tools in the Australian market are the deed of company arrangement or the DOCA, is the tool that we see used more than any other in the coming months; there're also going to be other situations where the creditors' scheme of management will be the preferred option. Both the DOCAs and schemes can be very powerful tools. Both have their own limitations and every situation will need to be considered individually to decide which is the right tool to use. So, for the next couple of minutes, I'll just talk briefly about some of the pros and cons of each of the DOCA and the creditor's scheme.
Starting with the DOCA, on the plus side, it's a natural process; it's relatively straightforward to implement it. So the document itself is a relatively straightforward contract; low voting thresholds to implement a DOCA. Fifty % of creditors by value and 50% by number, and everyone votes as a single class. So if you have a DOCA proposal that's supported by the voluntary administrators and recommended, then it's generally relatively straightforward to persuade the creditors that that's the best outcome at the second creditors' meeting. And, importantly, DOCAs can be used to cleanse companies of all their pre‑appointed unsecured liabilities, so a DOCA is there as a tool that can give a company a fresh start in the current climate.
There are limitations, though, on what a DOCA can do. It's only available in an insolvency, so VAs have to go in first, so sometimes that does lead to some destruction of value. DOCAs are only available if a company goes through that process. One of the major limitations of DOCAs is that it can't be used to fund secure creditors unless they vote in favour of it. So if you've got a situation where value is breaking in the secure debt so it's not going to be feasible to pay out the secured lenders and you've got multiple secured credits with divergent views, which is often the case, then a DOCA might not be the right tool to implement that restructure. DOCAs can't be used to release third party claims: that was tested in the last downturn, in one of the Lehman Brothers cases, and DOCAs don't have that power. And, I think, importantly, as well with DOCA there is always a risk of core challenge.
The other option is the creditors' scheme. They tend to be used for the bigger matters; they have a series of important advantages. They can be a solvent. Importantly, they can be used to bind secured creditors. So if you've got a syndicate of secured lenders with divergent views, then ultimately a creditors' scheme may be the way to go and to force a restructure through. And then there's the court process, which provides a lot more certainty. It provides an opportunity for people to complain and disagree but, ultimately, if it's approved by the court, then the creditor group will have a lot more certainty; then that's the right tool. So, overall, there are some drawbacks as well with higher voting thresholds' cost and complexity, and which we like as well but clients are sometimes less keen on it. Taking those processes together, between DOCAs and schemes, the tools are there to plan just about any form of restructure under Australian law, and, hopefully, we'll see those being used in some creative ways, and recapitalisations being used to return companies to solvency and preserve some jobs. I'll hand over to Przemek to talk a little bit about the magic provision.
Przemek Kucharski Thank you very much, Chris and hello, everyone. There's been a lot of focus on the COVID-related law reforms, naturally because they're new. But, as Chris pointed out, one thing that the pandemic has shown and then probably something we can take comfort from is that, you know, at least when it comes to formal insolvency, the pre‑existing laws do have enough gear built into them to effectively deal with extraordinary circumstances in targeted ways. We've seen that, in particular, in the context of court applications, made by the Virgin administrators, and you see on the screen there a quote from Justice Middleton of the Federal Court, who has been hearing those applications, and flexibility and innovation are the current watchwords. But we've also seen it in less high-profile cases: in particular, two retail administrations that I'll touch on, Colette Hayman, and G-Star; and Alf and our Brisbane team have been working on the G-Star administration. And that remarkable flexibility that we've seen comes in particular from section 447A of the Corporations Act, which is sometimes called the magic provision.
And, in the context of an administration, essentially this provision gives the court the power to make such orders as it thinks appropriate about how administration laws are to operate in relation to the particular company. In other words, the court has very broad discretion to vary the default rules that would otherwise apply in the context of a particular administration. I mean that in the context of the pandemic over the last few months, we've seen section 447A used in a number of ways. Firstly, to deal with the logistics and practicalities of administrations, especially where, you know, we're in a lockdown and everyone is working from home. So in the context of the Virgin administration, the provision was used to get orders from the Federal Court about, you know, notifications of meetings by email, electronic voting, extensions to convening periods and holding creditors' meetings virtually. And the word on the street is that administrators love virtual meetings; they don't have to face a crowd of angry creditors. They only need to take the questions they choose to take, and they can post answers to other questions on the website. And, of course, they can end the meeting at any time, so that's a solution that administrators have loved.
Secondly, we've also seen section 447A used to retrospectively fix potential issues. So the court can make orders with retrospective effect under the provision. Section 1322 of the Corporations Act is also one that allows the court to fix irregularities. So, in the context of the Virgin administration, there was one company for which the notice of the first creditors' meeting was sent out less than five days out from the meeting. This provision was used retrospectively to fix that issue so that the meeting wouldn't be considered invalid.
Thirdly, the provision has been used in the context of limiting administrators' personal liability. Obviously that's a subject that's always close to administrators' hearts, and particularly in the Virgin context, it was used in a way that, again, gave administrators more time to consider whether they would adopt particular leases both of premises and of plant and equipment like aircraft. It also allowed the administrators to put in place a regime dealing with pre‑existing contracts under which the business may want to continue obtaining goods and services. Ordinarily, the administrators would be personally liable for that, with the effect that those creditors would effectively have priority through the administrators' indemnity and lien. What happened in Virgin was that a limited recourse regime was put in place, so the understanding is that relevant creditors would continue to be paid out of the existing assets of the company, but the administrators would not be personally liable for any shortfall.
And also, you know, there was an interesting point around JobKeeper. The JobKeeper legislation makes employers potentially liable for overpayments or fraud associated with the system. The administrators were concerned they might be personally liable as a result of that, in the context of seeking to bring about JobKeeper payments for Virgin employees, and they obtained orders from the Federal Court limiting that personal liability. The ATO was represented in one of the hearings and didn't object to those orders being made. Now, so far, everything I've mentioned is not exactly unprecedented. And we've had instances of these sorts of orders being made by the court before the pandemic. Although the willingness of the court, and the speed with which the court has made these orders in the pandemic, and making all of these in the context of one administration such as Virgin, is interesting.
But the last point I want to touch on is one where, arguably, the court has gone beyond that, and made unusual orders in extraordinary circumstances, and that's to do with the two retail administrations that I've mentioned, Colette Hayman and G‑Star; and those orders were made under section 9015, which is similar to section 447A. Essentially, in those administrations the administrator sought orders to say that they will be justified in continuing to remain in possession of premises without paying the landlords for the use of those premises. The court, and in the case of G‑Star, those were made against the express objections of the landlords, who appeared in court. In those cases, the court essentially accepted evidence, including, in the instance of G‑Star, expert evidence to the effect that if the administrators had to pay rent, and would be personally liable for that rent, they would have to shut the businesses immediately, which would eliminate the chances of either business being sold as a going concern or which is something they were attempting to do, which would also mean that employees would have to be retrenched immediately and stock could potentially have to be sold under fire sale conditions. In the G‑Star administration there was also expert evidence saying that a better price can be obtained for stock if it is sold from the existing stores.
So, taking all of that into account, the judges there made the orders that the administrators were seeking. It was acknowledged that those orders were extraordinary because the court was being asked to bless an arrangement which effectively preferred some creditors over others. Under ordinary circumstances, the rent would have to be paid, the administrators would be personally liable, so the landlord would have priority. The court was being asked to change that. Ultimately, the court decided in both instances that changing those default rules was in the interests of the body of creditors, as a whole, even if that meant, individually, landlords may not recover as much. It was acknowledged that, you know, that was an unusual outcome in extraordinary circumstances. So it's good to know that this is a very flexible tool with broad applications. Section 447A is available. It's always been available; it continues to be available. In the context of the pandemic, in particular, it has led to bespoke unusual targeted solutions. It would be interesting to see what happens once we are out of the pandemic. And whether these cases are seen to set broader precedents. So that's all I had. I encourage you to post your questions or in the app. I'll now hand over to Miranda and Phil in our Perth office, to consider where we are headed to from now.
Miranda Cummings Thanks very much, Przemek. So, having heard everything from our panellists today, where does that leave us? I'll be having a look at where we are now, by reference to two different images. So, firstly, looking at the graph on the left of the slide. This is a graph from ASIC. What it shows is external administration and controller appointments on a weekly basis, compared to the same week last year. So the dark blue line is this year, and you can see it's well below the pale blue line from 2019, and it's been that way for a number of weeks now. So, essentially, for March, external administration and controller appointments are down on a week-by-week basis, which certainly reflects what we've been hearing in the market, even though the media are, of course, more focused on the higher-profile instances, appointments, such as Virgin.
But looking at this data another way, though, what it does in fact illustrate is that there's over 600 appointments of external administrators and controllers, which would have likely occurred in the ordinary course of events across March, April and May 2020. But this year, those appointments haven't occurred and largely, we assume, that that's a result of the various forms of the Government supports discussed earlier today, which, of course, have propped up and supported businesses which might have otherwise gone into an external administration in any event, due to factors entirely outside those arising from the impact of COVID-19. So in effect, and where we are, is that, on top of issues arising from COVID-19 impacts, we are cognisant and should be aware that there are also potentially hundreds of appointments, which have, in effect, been put off for a period of time, and it will be very interesting to see whether these do materialise, or whether companies have found ways to work through them during the six months extraordinary couple of months that we've been through.
So, that takes me quite neatly to the second image on the slide. And, as has been alluded to a couple of times today, it's recognised that we are at this stage looking very much towards a cliff at the end of September, when Government measures and supports are currently set to come to an end. And it's really not clear at this stage whether they might be extended or continue in the same form or a slightly different form. But, earlier in the webinar, Tania referred to the variety of law reforms and other measures that have provided companies and their directors with really useful and immediate relief. And these are set pretty much in all cases to come to an end in the last two weeks of September. That includes JobKeeper, the COVID-19 safe harbour provisions, the changes to the statutory demands and bankruptcy notices, both time periods and also thresholds. And so one real concern at the moment is they're all coming to an end at the same time, leading to significant pressure on businesses from a variety of perspectives.
So to start with, from a director's duty perspective, insolvent trading concerns, as well as creditors enforcing statutory demands which are back in a 21-day deadline. But most of all, perhaps, it's the cash flow issues because of the end of the tax relief, end of the rent relief and then the question of when the arrears are due. Loan repayments, employee wages and all at a time when, really, sales revenues from many businesses are still likely to be down. So, really, as it presently stands, businesses will be going from being cushioned on a number of fronts, to having most, if not all, supports removed within a very short period of time. And that, of course, then raises concerns of a flow‑on effect, as one collapse impacts creditors and also others engaged with that business. So as to the Government response to date to this impending cliff, and then where it looks like we're heading from here, I'll hand over to Phil Blaxill, one of our Perth partners, to address that but also look at how to influence what comes next for businesses. Thanks, Phil.
Philip Blaxill Thanks, Miranda, and hello, everyone. I'll just spend the next few minutes drawing together all the threads of what you've heard so far. And firstly, at this stage, there's very limited Government assistance to help companies with the cliff. Government seems to be moving towards more targeted support for sectors, such as the housing construction sector and the arts and entertainment sector, which you would have read about in the press on Monday. There are suggestions of more to come. But other than that, it seems to be that the longer IR reforms and vocational training or the Jobmaker is, is the central plank. Having said that, though, recovery is a sector-specific thing. And currently, different sectors are in different stages and some will bounce back better than others. Mining in WA, being a significant part of our economy here in WA, has responded very positively to COVID and continues to be strong throughout, and iron ore and gold look like being foundations for a national recovery. Agriculture looks good, too, although there is always the weather climate issues, and, as we've seen recently, issues maybe arising from trade embargoes that affect that industry. Oil and gas has suffered a double whammy, both with the effects of COVID and the price war. It's really suffered globally, and in Western Australia and across Australia as a whole have been put on hold. And, I think, as a consequence of that, the service companies to the oil and gas sector will be the hardest hit. The issues affecting retail pre‑COVID have been accelerated, as we've seen. The supermarkets, as we know, are doing fine. However, the series of retail-related insolvencies which Przemek referred to are just beginning, we suspect. Property will also be hit quite hard, particularly in relation to the retail sector, but also there will be some change with working from home becoming a more normal feature of working life and changing the office environment.
There will also be pressure on house prices, due to a probable rise in unemployment. Hospitality – well, that's opening up now, as we know, and we're glad about, but that will look something different for some time to come. The question is how different and for how long? These are questions which are very difficult to answer, so it not only depends on the way in which the Government opens things up, but also on consumer sentiment and, of course, as to whether or not there's that dreaded second wave. Tourism likewise has had to pivot to local tourism and looks to stay that way for some while. And the question arises as to whether that will be sufficient and whether all tourism businesses will survive. I'm just thinking about the way in which we deal with companies, going forwards. As we've seen, ASX listed companies and larger businesses seem to be taking action now; and probably as a consequence of the consciousness of duties as directors. SMEs are perhaps more likely to be hibernating and likely to be most affected by the cliff.
However, whatever the size of the business, I think now is the ideal time for advisors and bankers to encourage and work with businesses to plan their rebuild. And, as Tania said, the first question must be whether the company is solvent. If not, or if the company is close to insolvency, you need to have a viable safe harbour plan. Not a COVID safe harbour plan, but the traditional safe harbour plan, and that will be critical for directors to facilitate the restructure. The safe harbour plan and any solvent restructure plan, if that's possible, will need to consider things like: what is the right size for the business from a turnover perspective? And can the business pivot and innovate? What costs does the business need to cut to make a profit with this new right-size business? And then how does it cut those costs? It'll need to consider things like reorganising the workforce, renegotiating contract terms, smaller premises and things like that. As well, any plan will need to deal with the current creditors' and settlement of existing creditor claims will be significant and de‑leveraging debt negotiations with lenders will be critical. And, possibly, that would be a consideration for capital raisings divestments, and maybe even debt for equity swaps.
And, of course, in the back of everyone's mind, we need to be considering that as soon as a safe harbour plan is no longer reasonably likely to lead to a better outcome than the immediate administration or liquidation of the company, then the directors should consider that position and consider the insolvent restructure route. As Chris described, now is perhaps an ideal time in that circumstance to consider a DOCA and a scheme of arrangement. And, as Przemek said, there are plenty of tools available within the insolvency regime to be able to restructure well. I think, probably, now we've got to a state in the world where insolvency shouldn't be seen as a failure, but as an opportunity to restructure and recover some value that would otherwise be lost. So, in conclusion, I think it's inevitable that there will be a multitude of restructurings, of a multitude of businesses in multiple sectors. And as we've seen, we've got a restructuring toolbox that's ready to use. And some of those tools should be used right now: in particular, safe harbour ought to be used sooner rather than later. And we will see those tools being used and becoming very important in the coming months. So thank you very much. I'll just hand back now to Alf, who'll deal with questions
Alf Pappalardo Thanks, Phil, thanks to the presenters. We've still got five minutes left. I'm pretty keen to finish on time‑ish, so I'll just try and select a few of the questions that address the different topics. I won't be able to answer them all, sorry. The first question, and I'll throw this to Tania Cini, and the question is, do you see the insolvent trading relief provisions extending beyond September? And will there be a knock-on in terms of amendments to insolvency law generally? Tania?
Tania Cini Yeah, thanks, Alf. Look, I think this throws back to what we were saying earlier about whether the situation is stable enough for businesses to be able to properly forecast and work out where they're going to be, you know; the sorts of restructuring plans that Phil was talking about require there to be a certain level of stability to be able to predict what's going to happen in the future. And at the end of the day, while this is very much an economic crisis, it is primarily a health crisis. So I think that whether the Government thinks we need more relief on insolvent trading will be in part dependent on how the next couple of months go in terms of the health side of things, and how predictable that's going to be, and therefore how predictable everything is going to be in terms of 'going back to business as usual' (in inverted commas) because there is clearly no business as usual. But I think it's, you know, as I said earlier, I think the insolvent trading belief was done to allow the sort of storm to pass, and for us to get some clear air to work out where we're going to from here. If it's still sufficiently uncertain coming into September, I think there'll be real pressure to extend that relief. As to the flow-on effect – yep, I think, as I said, of the Law Council work that's been done. People are looking at a whole range of other issues that require amendment, things like preferences; clearly, we've got a whole lot of businesses who are currently insolvent paying amounts. If they do go into insolvency, there'll be a whole lot of preference payments due to be paid but it seems ironic to be creating insolvent trading relief and then clawing back payments from people who've received payments during this time. So things like that, I think, will need to be looked at and potentially changed.
Alf Pappalardo Thanks, Tania. The next question is to do with schemes of arrangement, so I'll ask Chris Prestwich to answer it. The question is, given the current circumstances, are courts more likely to approve schemes, even over the objections of some stakeholders? Chris?
Chris Prestwich Yeah, it's a good question. I think the answer is yes. I think the courts are going to want to be – I think the courts will be very supportive of a scheme which is being used to recapitalise a company and enable it to continue trading under a scheme that's designed to avoid liquidation as well. One of the great things about schemes is that we have the Supreme Court and the Federal Court both competing for businesses, and both wanting to be seen to be scheme friendly, so that's always a good dynamic as well. And I think the courts will recognise the importance of using creditor schemes as a means of restructuring companies, and they will want to support rather than hinder that process; there'll, no doubt, still be some legal fights to be had, but overall the courts have historically been supportive of schemes and I think we'll see that continue.
Alf Pappalardo Thanks, Chris. We're right on time but I'll just squeeze out a few more questions. And then the questions we don't get to, we'll actually endeavour to revert to the questioners afterwards with answers. So the next question is one to do with force majeure. So I'll throw to Kim Reid. And the question is, what is the position with those contracts that terminate or expire during the COVID period with force majeure clauses, and they're only renewed post COVID without force majeure causes? Kim?
Kim Reid Thanks, Alf. So the force majeure clause is designed to suspend your performance obligation, for example, while the COVID issues are on foot; and then post COVID, if the contract remains on foot, those obligations can be re‑enlivened. But the scenario in that question assumes the contract is terminated. And there's a question about what happens if there's no force majeure clause. That's dangerous. So, Phil mentioned the second wave; if there is a second wave, you will want to have negotiated a force majeure clause into your contract which refers both to epidemics and pandemics but also to COVID or any, you know, re‑enlivenment of COVID in the form of a second wave. Without that, you're left with the frustration principles that I spoke about earlier.
Alf Pappalardo Great, thanks. Kim, just a couple more. This question is about continuous disclosure, so I'll throw to Kate Towey on it, and the question is, do you see any of the Government's temporary changes to the Corps Act becoming permanent? For example, the watering down and continuous disclosure obligations? Kate?
Kate Towey Thanks, Alf. Look, I think in relation to the continuous disclosure modification – and I brushed over that necessarily earlier because I'm just conscious of time – but, really, the basis of that modification, it's quite limited; it's a modification of the test in the civil penalty provisions. So the ordinary test relies on a reasonable person test in relation to whether a reasonable person would expect information to have a material effect on price or value, and the modified test is that non-public information only needs to be disclosed if the entity knows, or is reckless or negligent with respect to whether that information would have a material effect on price or value. So it's really targeted at encouraging boards to be confident in giving earnings guidance and making forward‑looking statements in this period where things are so uncertain. As a matter of policy when we return to a more normal world, I would not expect that, as a matter of policy, the Government would want that particular modification to continue. It's also quite a limited modification so it doesn't really give you a holistic relief, if you like, or a lower bar in relation to continuous disclosure generally. So I certainly don't see that modification continuing. The question referred to, you know, various modifications of the Corporations Act and I do think, you know, we've also seen modifications around meetings and electronic signatures and things, and I do think that this period has forced a bit of acceleration around policy for around technology, and making things easier and more practical, so I wouldn't be surprised if those sorts of modifications, maybe not in the form that they're in, but we do see legislative change going forward in relation to other aspects, but I wouldn't see that continuous disclosure modification having a permanent effect.
Alf Pappalardo Okay, thanks, Kate. One last question, and apologies to those of you who we didn't get to, but we will endeavour to come back to you separately. This question is about the magic section 447A, which is truly extraordinary. So I'll address it to Przemek. And the question is, have there been any refusals by courts of section 447A orders, especially on the basis of taking advantage of the current environment? Przemek?
Przemek Kucharski Probably some. The short answer is, I'm not aware of any major refusal of requests under that provision from administrators that have been made in the context of the pandemic. As I said, it's quite a remarkable feature the extent to which courts have bent over backwards to try to facilitate restructure administration outcomes and grant administrators' requests; in some instances, requests that push the envelope, arguably, of what would have passed muster before the pandemic. It's sometimes been said that limitation of section 447A is that it's not meant to be used to get the courts to bless what are essentially commercial decisions.
And even that in the context of the pandemic seems to have taken a bit of a back seat, and in the context of the collect group decision that I mentioned, the judge acknowledged that what was being asked in terms of rent relief had a commercial aspect to it, but nonetheless was willing to make the order. I think those decisions perhaps reveal a slight limitation of the Code that the Federal Government has tried to put in place to facilitate businesses and landlords reaching negotiated commercial arrangements during the pandemic. In the context of the Colette decision, initially the administrator sought to negotiate with landlords and seek an agreed 100% reduction of rent, and then the landlords offered 9%. So, the administrator went to court, with the outcome that we've heard about. In circumstances where an administrator has only five days to decide whether to adopt leases and might be personally liable, and where the ongoing viability of the business is at stake, you can see why they seek these orders and you can see why courts have bent over backwards to try to facilitate an outcome that is more likely to facilitate the business surviving as a going concern, even if that means that that some creditors don't get the priority they otherwise would have
Alf Pappalardo Great, thanks, Przemek. I'll start winding up. Just, then, a few housekeeping things. First of all, when this webinar finishes there will be some sort of a survey magically appear on your screen. If you could please fill it out when you get a chance, that'd be great. We'd appreciate any feedback; caustic, generous, or otherwise. And secondly, a lot of thanks, thanks a lot to all the presenters, first of all, for putting in the presentation. Thanks very much to Sam Lacey and her team for a technological marvel that this thing is; so, much appreciated, all of you. And thanks, of course, to everyone who's logged in from everywhere across Australia and elsewhere for the webinar. We hope you've taken something out of it. We're currently looking at doing another one in September, which we think is timely, given that's when we think the cliff that some of the speakers have mentioned is going to be approaching, and we'll be in a better position to know a few things like whether the Government will be extending any of the moratoria opposition banks and borrowers in the general economy are in, so that should be a fascinating one. So without further ado, thank you all very much, apologies for running overtime, and we look forward to seeing all of you again in September. Thanks very much.
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