Steering through uncertain seas: creditor solutions to navigating COVID-19

Articles Written by Joseph Scarcella (Partner), Nicola Bailey (Senior Associate), Sean Lally (Associate)

Times are changing rapidly with the current flow of Coronavirus measures introduced to support businesses in debt and distress.

We take a look at what creditors can (and can’t) do to help better protect their position.

I’m owed money. What can I do?

Certain recent government measures may impede your ability to take recovery or enforcement action at the present time. The good news is that many avenues remain available.

You cannot (in some cases):

1. Terminate a commercial leasing arrangement due to a tenant’s non-payment

Applying to landlords and tenants of commercial leases who meet its criteria, the National Cabinet Mandatory Code of Conduct – SME Commercial Leasing Principles during COVID-19 (Code), amongst other things, operates to prevent landlords from terminating leases due a tenant’s non-payment. This prohibition applies during the Coronavirus pandemic and subsequent recovery period, where the tenant is otherwise complying with the terms of its lease.

2. Draw on a tenant’s guarantee or security

Under the Code, landlords are also precluded from calling on a tenant’s guarantee or security to satisfy any non-payment of rent. This prohibition applies uniformly across cash bonds, personal/bank guarantees and other forms of surety. However, residual opportunities involving securities may be open to the creditor, as discussed below.

3. Rush off to Court

The general law principle of not acting in bad faith continues to apply. Whilst proceedings can still be commenced, care must be taken to ensure all relevant thresholds are met. For instance, most Federal Court proceedings require a statement setting out the genuine steps that have been taken to try and resolve the dispute before the commencement of proceedings. You should also check whether your terms and conditions / contracts have any prerequisites to the commencement of proceedings, such as the issue of a breach notice or the requirement to mediate to seek to resolve the dispute.

You can:

1. Review your contractual documents and policies

The terms and conditions of your contract may provide guidance to available forms of relief. Amongst other things, they may:

  • Permit you to take a security interest in the goods of your customer or of your customer’s guarantor;
  • Determine what rights you can exercise in the event of default and how they must be exercised;
  • Permit a cessation of supply without you breaching your own contractual obligations.

Some companies and financial institutions also have dedicated hardship / COVID policies outlining additional guidelines for handling payment deferral requests, freezing of interest and moratoriums on enforcement. These policies should be considered alongside the terms and conditions of your particular contractual documents with each customer.

2. Enforce a security interest or seek additional security

Your existing terms and conditions may already provide that your customer grants a security interest in your favour over one or more of the stock that you supply to the customer (retention of title), specific property (such as a real property mortgage) or all present and future-acquired assets of your customer (commonly referred to as an ‘All-Pap’). Similar interests may be granted by the director(s) or guarantors of your corporate customers.

Subject to the terms of your contract, you may be able to call upon your security / guarantee to secure payment of debts due (save for the leases described above). If your current terms do not provide for the granting of such interests, you may wish to discuss security terms with your customers.

3. Commence legal proceedings

Legal proceedings can still be commenced, including to seek recovery of a debt, enforcement of contractual rights or securities or an application for an injunction to prevent the dissipation of assets.

Various courts have published guidance notes on their websites detailing changed practices surrounding the commencement of proceedings; these should be considered carefully.

4. Encourage your debtor to apply for available government assistance

Jobkeeper payments, cash flow support and increasing the instant asset write-off are all examples of government stimuli that may help free up some cash for your debtor.

Speaking to your debtor about accessing and applying for available relief, including possible BAS and PAYG deferrals for your debtor with the ATO, could assist you both.

Business as usual?

Creditors should expect that results will likely take longer to be realised. For instance:

  • Debtor companies are now permitted six months (rather than 21 days) to respond to a creditor’s statutory demand. A similar extension of time applies to bankruptcy notices.
  • Rental deferrals under the Code must be amortised for no less than 24 months.
  • The capitalisation of interest on any paused repayments will likely increase the actual overall term of the loan. 

Accordingly, if contemplating revising payment arrangements with your customer, it may be necessary to consider, amongst other things:

  • The treatment of interest, including whether it will be capitalised or waived.
  • The value of securities held, including any likely depreciation in value.
  • Whether any ancillary or collateral contracts require amendment or extension to remain effective for the duration of the (new) term.
Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).

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