Coronavirus – protecting your business

Corporate & Commercial 21 March 2020

Who could ever have imagined when we first started to hear, in around early January this year, about the Coronavirus emerging in China, that the first Round of the AFL 2020 season would be played at an empty MCG as a result of the outbreak. But here we are! The virus has spread around the globe with dramatic speed, causing havoc to the way we live our lives.

The impact of the pandemic on communities and businesses around the world is enormous. Significant economic disruption is already being experienced and will continue to escalate for the coming months as the impact of COVID-19 bites harder. Beyond the obvious strain being felt by our health and aged care systems, industries such as aviation, hospitality, retail, tourism, sport and entertainment are reeling with the immediate financial disruption to their business. Financial markets (and our superannuation funds) have been hit hard. Other industries will soon follow suit as the ripple effect takes hold. Government intervention with respect to steps to contain the virus only adds to the complexity of how commercial ramifications arising from the Coronavirus may play out.

We share some insights that might assist you with navigating your way through these challenging and uncertain times.

1. Contractual compliance – delay

We are seeing instances of delay impacts up and down the supply chain. International trade is hampered, manufacturing is being delayed, as is freight, shipping and ports clearance. Business that are dependent on international supply of goods to meet contractual obligations need to carefully consider how delay risk is allocated in their contracts. Our domestic industries are sure to experience similar supply constraints as product scarcity increases and workforce productivity declines. Contractual consequences for breach arising through delay can be significant. Businesses should carefully analyse their supply chains for vulnerabilities and susceptibilities to contractual non-compliance.

1.1 Force majeure

Contracts often provide a mechanism for claiming the impact of delays through extension of time provisions. Such mechanisms employ concepts such as ‘force majeure’ and ‘act of prevention’. In some circumstances, these concepts entitle a party to relief from the consequences of failing to perform contractual obligations for reasons beyond its control and where the impact of the delay cannot be overcome by the exercise of due diligence. These mechanisms usually require observance of strict procedural and time bound processes in addition to demonstrating contractual entitlement, for a claim to be effective. A parties’ ability to rely on these provisions requires assessment of the terms of the relevant contract. Clients that may be impacted by delay should familiarise themselves with how relief provisions operate in their contract.

1.2 Frustration and termination

Where force majeure relief is not available or is insufficiently broad to capture the Coronavirus, other mechanisms may be available to obtain relief against contractual compliance. Terminating a contract for convenience may be possible. Hardship provisions that enable termination of a contract that has become excessively burdensome may be able to be utilised. It may also be possible to contend that the contract has become “frustrated”, that is, incapable of being performed as a result of unforeseen events, without the fault of either party. In such cases, a party may be discharged from its obligation to perform the contract. A contract is not frustrated merely because it becomes more difficult or expensive to perform; the circumstances in which the contract must be performed in light of the unforeseen event, must be so radically different to what the parties contemplated, as to make the contract virtually impossible to perform.

2. Workplace Relations

Employers are grappling with how to safely and efficiently manage their workforces as the outbreak continues to spread. Communication with staff and other stakeholders has never been more critical.

Of primary importance, employers need to ensure as far as reasonably practicable, the health and safety of workers. Businesses need to ensure that risk management policies and procedures are either implemented or adapted as required to respond to the crisis. At a minimum, employers should conduct a risk assessment of the workplace and implement reasonable control measures to maximise workplace safety. Employers should also promote flexible working arrangements that minimise direct interpersonal contact where possible and encourage hygienic work practices. Non-essential travel and group interactions should be carefully reviewed and suspended where possible. Risks arising from alternative working arrangements must also be carefully assessed.

In terms of workforce management, employers must continue to comply with contractual and statutory minimum entitlements under the Fair Work Act 2009 (Cth). Employment instruments, such as modern awards, enterprise agreements and contracts need to be carefully considered to assess what operational flexibility might be accommodated and what directives an employer may be entitled to make. Provisions dealing with paid time off, sick leave, leave without pay, reduction in hours and employee stand down, will come into sharp focus.

3. Corporate activity & Insolvency

We are already seeing signs of COVID-19 affecting corporate investment. Access to finance has tightened which in turn has jeopardised completion of business sale and purchase transactions. In some instances, funding pre-approval has been withdrawn and transactions have stalled.

3.1 Financial default

With the economic impacts of the outbreak being felt so broadly, lenders will be focussing closely on borrowers’ ability to repay loans. Financial and information covenants forming part of loan facility documents may trigger default provisions. Contractual default and enforcement risks can be expected to impact both businesses and individuals.

3.2 ‘Safe harbour’ relief

Amendments to the Corporations Act 2001 (Cth) implemented in September 2017 establish what is known as the ‘safe harbour’ regime. This regime provides protection to directors against potential liability for insolvent trading by companies, in certain circumstances. The regime seeks to achieve a balance between protecting creditors from insolvency risk and enabling directors to trade out of financial distress. Directors’ ability to attempt to trade out of financial difficulty has traditionally been limited by the risk of exposure to personal liability for insolvent trading, that is, not being able to pay debts as and when they are due. Directors of companies incurring debts whilst insolvent can be personally liable for the debts so incurred. For safe harbour protections to apply, directors must in addition to satisfying statutory pre-requisites, be developing one or more courses of action that are reasonably likely to lead to a better outcome for the company (than ‘going under’). The safe harbour regime may be relied on more than ever before as a means to enable companies to continue to operate.

3.3 Managing cash flow

Businesses that have ensured they have sufficient cash reserves to continue operations through the disruption are best placed to absorb the emerging economic shocks. Conversely, businesses with large debtors and who are unsecured creditors must develop strategies to boost cash flow. Strategic considerations include sending payment demands, negotiating restructured payment obligations, commencement of recovery proceedings or issuing statutory demands ( a process by which a debtor is forced to prove its solvency). None of these approaches are without risk and caution should be exercised.

3.4 Personal Property Securities regime

With increased insolvency risk, comes an increased risk of non-payment from customers for goods supplied. The Personal Property Security regime allows parties, in some circumstances, to take a security interest in personal property that is in the possession and control of another party. A security interest can commonly arise where goods are sold to a customer on credit, that is, a customer holds the goods but does not legally own them until payment is made. The ownership interest in the goods sold remains with the seller. The seller can use the PPS regime to register its interest in the goods and notify others of that interest by publication of its interest on a public register. The seller becomes a secured creditor where its interest is property registered. In the event that the purchaser of the goods goes into administration or liquidation with an outstanding debt in relation to the goods, the party with a registered interest in specific goods is able to recover the goods and avoid them being realised for value and distributed to the debtor company’s creditor pool.

This regime is only accessible where the terms of the sale contract create the necessary security interest and specific processes are followed. Registration must occur up front and security cannot be obtained retrospectively. You should seek specialist advice if you are contemplating using the PPS regime to secure your interests.

4. Consumer Law

Demand for goods exceeding supply of goods naturally leads to price increases. Some retail industries will be experiencing exceptionally high demand for products, creating a temptation to increase pricing. Our corporate regulator, the Australian Competition and Consumer Commission (ACCC) is expected to take a strong interest in significant increases in pricing, perceived as “price gouging”, particularly in circumstances where a supplier has significant market power that may be misused. Misleading consumers about the availability of goods in order to stimulate price rises is also likely to cone under the scrutiny of the ACCC.

Conclusion

The speed with which the impact of COVID-19 has been felt across the globe is alarming. New developments and disruptions emerge on a daily basis and the business landscape is constantly changing. Complex and evolving commercial legal issues continue to arise and require prompt attention and response from all levels of business.
Coulter Roache’s team of commercial & corporate, workplace relations and litigation lawyers are available to assist you with understanding your options and dealing with the fallout of the pandemic.

The views expressed in this article are intended as general commentary and are not intended as legal advice. If you would like advice on how the Coronavirus may be impacting your specific circumstances, please contact our team of experts.

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