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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.
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.
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.
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:
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.
Creditors should expect that results will likely take longer to be realised. For instance:
Accordingly, if contemplating revising payment arrangements with your customer, it may be necessary to consider, amongst other things:
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