Colleagues - The Official SV Partners Newsletter - Issue 029 September 2020

IN THIS ISSUE 01 Zombie Businesses Set to Continue with JobKeeper 2.0 03 Presumption of Advancement:

The Importance of Documentation in Property Purchases

04 Director Duties in the COVID Environment

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Zombie Businesses Set to Continue with JobKeeper 2.0 Joshua Robb - Associate Director | Newcastle

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n March 2020, the Government’s early response to the economic consequences of COVID-19 included temporarily suspending Australia’s Insolvency Laws under the Coronavirus Economic Response Package Omnibus Act 2020, with an expiration date of 25 September 2020.

On 7 September 2020, the Federal Government announced the extension of the temporary relief for financially distressed businesses which included the extension of the temporary insolvency and bankruptcy protections until 31 December 2020.

Regulations are expected to be made to: ►► Extend the temporary increase in the threshold from $5,000 to $20,000 on which bankruptcy notices can be issued; ►► Extend the temporary increase in the threshold from $2,000 to $20,000 at which creditors can issue a statutory demand against a company; ►► Extend the response time to respond to statutory demands from twentyone (21) days to six (6) months; and

►► Extend the temporary relief for directors from any personal liability whilst trading insolvent.

What is a Zombie Business?

In June 2020, a survey of insolvency and reconstruction professionals undertaken by the Australian Restructuring Insolvency and Turnaround Association (ARITA) outlined a reported increase in the number of “zombie businesses” as a result of the Government’s protection measures.

“Zombie businesses” are commonly defined as entities that were facing liquidity issues before COVID-19 and are continuing to trade, relying on the Government’s stimulus and protection measures, such as JobKeeper and the temporary relief from insolvency laws, with no genuine prospect of staying afloat in the future.

According to a November 2019 report

by KPMG Australia (Distance to Default: a Default Indicator for Australian-listed Companies Volume 6), approximately one in seven ASX listed companies were trading in “zombie territory”.

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Joshua Robb Associate Director

►► Do you have the same customer/ client base as before COVID-19? ►► What can you do to increase your income? ►► Are you able to reduce your overheads?

It is important that you have a Plan B strategy in place.

Given the future economic outlook, it is expected that most businesses are going to feel the pinch before 31 December 2020. Businesses will need to face the reality that they are going to have to continue to deal with the residual debts from COVID-19.

“Approximately one in seven ASX listed companies are trading in zombie territory” Businesses that would have otherwise failed are being kept alive by a combination of the Government’s measures, designed to give temporary support to going concern businesses.

Why Early Action is Important If you or your client are relying on the JobKeeper scheme, you will need to have a plan in place when JobKeeper ends. Whilst it is tempting to wait and see what happens, you are running the risk of becoming a “zombie business”.

The amendments to the temporary insolvency laws have given directors greater protection from being personally sued if their business incurs further debts whilst being insolvent.

However, it is important to remember that these measures do not include protection from your duties as a director, such as: ►► Duty to Act with Due Care and Diligence (Section 180)

►► Duty to Act in Good Faith (Section 180) ►► Duty to act in Good Faith, use of Position and Use of Information (Section 184) ►► Director Penalty Notice claims by the Australian Taxation Office which can cover a mixture of PAYG, SGC and GST. Develop a Plan It is important to consider a “Plan B” approach. Now might be the time to consider a plan for the future by asking some critical questions, including: ►► Are your books and records in order? ►► Where do you expect your income to come from and will it be sufficient?

Recently appearing before the House of Representatives Standing Committee on Economics, RBA Governor Philip Lowe advised: “we’ll have to confront the reality that there are firms in Australia that are no longer viable because of the pandemic and they will need to be wound up… so there will be insolvencies. There will be bankruptcies. There will be some businesses that will not recover.

That’s the harsh reality of an economic downturn that’s the worst in 100 years”.

SV Partners regularly deal with businesses that have been or are at risk of becoming insolvent.

Getting the right advice early is paramount to achieving the best outcome.

Visit us at www.svpartners.com.au to learn how we can support you and your clients or contact us on 1800 246 801 for an obligation free consultation with one of our experts.

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which we determined held significant equity. The husband claimed the bankrupt wife’s contributions to the property were limited and he had funded the initial purchase of the property in full and for this reason argued the bankrupt wife’s interest in the property was negligible.

Presumption of Advancement

The Importance of Documentation in Property Purchases

Michael Jeston - Senior Manager | Brisbane

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n Australia one of the most common assets held by individuals is real estate, and in particular the family home. As a result, when administering bankrupt estates it is common that Trustees are required to deal with real property and the competing interests in the property held by the bankrupt and other parties, often family members.

Recently SV Partners has dealt with a number of bankrupt estates where family members of the bankrupt have claimed an equitable interest in the property, however no documentation existed to formalise the equitable claims of the family members.

This failure to document the intentions in relation to the property in question resulted in the family members losing any rights to equity in the property.

This leads us to consider the presumption of advancement. When particular relationships exist between parties (e.g. husband and wife), the purchase of property by one party (e.g. a husband) in the name of another party (e.g. a wife), will be considered a gift. In these circumstances, a resulting trust will not arise and the presumption of advancement will apply meaning the interest in the property will be considered a gift, unless evidence to the contrary can be provided (the importance of documenting intentions).

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Common relationships where the presumption of advancement may apply: ►► ►► ►► ►►

Husband and wife; Individual and his/her fiancé; Defacto couple; and Parent and adult child.

Despite the presumption of advancement applying to many types of relationships it, may be rebutted where evidence can be provided to demonstrate that the purchaser did not intend for the property to be a gift to the other party.

The onus of rebutting the presumption of advancement lies with the party who is considered to have gifted an interest in the property to another (usually the purchaser). The evidence must show at the time of purchasing the property, not at some later date, it was not intended that the interest in the property provided to the other party was a gift.

Two recent examples encountered by SV Partners are discussed below.

In the first example, a wife who held a joint interest in property with her husband became bankrupt. The wife had an ongoing relationship with her husband so no family law issues arose in the course of the bankruptcy.

The bankrupt wife and her husband each held a half interest in the family home

We invited the husband to provide documentation formalising the intention that the interest in the property provided to his wife was not a gift which he could not do. As a result, the husband was required to purchase the bankrupt wife’s 50% interest in the property from the bankruptcy Trustees.

The second example is a relationship between parents and an adult child. In this instance, the adult child became bankrupt and again held property. The adult child was the sole owner of the property and following his bankruptcy we concluded equity existed in the property which would need to be realised for the benefit of the bankrupt estate.

The bankrupt’s parents notified us they had funded the deposit required to allow the bankrupt to purchase the property.

We obtained documentation from the bankrupt’s parents which confirmed they had funded the deposit required to purchase the property, however there were no formal agreements regarding the provision of the funds.

As the presumption of advancement could not be rebutted, this left the parents in a compromised position. At best, the parents were left being able to submit a claim as creditors of the bankrupt estate instead of being entitled to an equitable interest in the property.

These examples demonstrate that the presumption of advancement can have a significant impact when dealing with property in a bankrupt estate.

For this reason, it is critical that appropriate documentation and agreements are entered into where funding for the purchase of the property is being provided by family members.

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oronavirus has had a significant impact on many aspects of our lives. Businesses around the world have been heavily hit, which has resulted in Australia’s economy entering its first recession in nearly 30 years.

Director Duties in the COVID Environment

To help combat the impact the virus will have on our economy, the State and Federal governments have introduced several measures to assist individuals and businesses, including stimulus packages, loans and other relief measures.

One key measure introduced by the Morrison Government was a temporary relief from insolvent trading for company directors. As you may know, a director has a duty to prevent a company from incurring debt whilst it is insolvent.

If a director fails to do this, they can be held personally liable for the debts incurred whilst the company is trading insolvent.

The temporary measures, introduced in late March, provided relief for directors from personal liability for insolvent trading for a 6 month period due to expire on 25 September 2020. This relief has now been extended to 31 December 2020.

A number of leading figures in our industry (and other industries for that matter) have debated the necessity of the extension, together with various other extensions recently announced. A quick Google search will point you in the right direction if you want to explore these debates further.

The purpose of this article is to highlight a number of other matters that directors should be aware of when making decisions regarding the ongoing operation of their business.

Outside of a director’s duty to prevent insolvent trading, there are various other duties a director owes to a company, as well as other potential recourses against directors that should be carefully considered by directors and their advisors, including: 1.

Statutory Duties: A director owes various duties to a company outlined in the Corporations Act 2001 (Cth), including to act with care and diligence in good faith, and in the best interests of the company.

Whilst these duties are owed to the company, that duty is taken to be owed to creditors in instances where

Adam Kersey - Associate Director | Brisbane

a company is insolvent. Whilst a director may be temporarily relieved of personal liability from their duty to prevent insolvent trading, reckless or dishonest trading and incurring debts in instances where a company clearly should not be operating may leave a director open to prosecution.

Criminal action can also be prosecuted in instances where there has been a reckless or dishonest breach of the director’s duties.

2. Personal Guarantees: It is not uncommon for directors to provide personal guarantees to lenders, suppliers and other creditors in the course of their business.

The Federal government recently extended the temporary increases in limits for issuing bankruptcy notices and statutory demands and the timeframe for compliance with these notices, making it more difficult for businesses to recover debts in the traditional way. Suppliers of companies should therefore consider alternate options, which may include pursuing recovery of debts from guarantors listed on credit applications. Creditors may obtain judgment against a director under a personal guarantee, which may have significant impacts on directors personally, including affecting credit ratings, breaching banking covenants and exposing director’s personal assets to attack (e.g. enforcement warrants, garnishees, etc.).

3. Superannuation & Tax Liabilities: Directors can be held liable for unpaid company superannuation and tax debts. Directors should ensure they are reporting their tax and superannuation obligations on time, even in the event they cannot always pay these liabilities in full at the time. The director penalty regime is unaffected by the relief measures introduced, and whilst the ATO may take a lenient approach to directors who have unpaid superannuation and tax liabilities during the COVID moratorium period, there is no guarantee that this will be the case.

Whilst the government relief measures are aimed at providing comfort to directors to continue operating during the pandemic, directors should not take that as carte blanche approval to continue trading a business that is consistently unprofitable.

The above analysis discusses just a few other ways a director may be impacted by continuing to trade a business in the current climate.

Directors should carefully consider the long-term viability of their business beyond COVID and the current recession, and seek advice from suitably qualified advisers as to their options to protect themselves personally from claims being made against them down the line.

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