Regulatory changes to provide relief for directors during COVID-19

Changes in regulation have given directors breathing space while they deal with the dramatic business interruption, but they will need to be across the financials leading up to EOFY, writes Tom Ravlic.

The federal government and several key regulatory bodies have moved rapidly to provide regulatory relief and much-needed guidance for directors. Provision of relief from various legal requirements in different forms comes as many businesses face the consequences of supply chain disruptions and decisions of policymakers to shut down parts of the economy to contain the spread of the COVID-19.

Directors need to consider what strategic issues businesses should take and whether a business is able to continue to run over the next year. This is stressful enough given the strictness of the law that operates regarding trading while insolvent and the servicing of creditors. However, the challenges multiply in difficulty when confronting the circumstances of a pandemic.

The federal government has sought to provide relief in specific areas in the law that are typically of great concern to directors of companies facing tough times. Treasurer Josh Frydenberg highlighted three principle areas on 23 March:

• Temporary increase in the required debt threshold for a creditor (from $2000 to $20,000) before a statutory demand can be issued. An accompanying amendment increases the period a business owner has to respond to such a demand from 21 days to six months.
• Bankruptcy law changes increasing the threshold amount creditors must have before they can launch bankruptcy proceedings from $5000 to $20,000.
• Temporary relief for directors from any personal liability for trading while insolvent.

The measures, lasting for six months, are designed to clear the pitch for directors so they can take the necessary actions to rebuild business without having to worry about certain parts of the law.

These three measures may not be the only ones implemented during the period in which societal restrictions apply during the pandemic.

For the next six months, the Treasurer will have the power to make additional amendments to the law that will last six months from date of issue.

The Australian Securities and Investments Commission (ASIC) will modify the way it operates. It will suspend a series of surveillance and enforcement programs, such as those impacting on the banking sector, while it is focusing on dealing with the regulatory fallout arising from the pandemic.

ASIC has also flagged that rules related to the holding of annual general meetings will be relaxed somewhat by using “no action letters” — an acknowledgement that the law has been breached by delaying an AGM, but ASIC will not seek to enforce the provision in the circumstances. While ASIC is encouraging the use of alternative modes of conducting an AGM under the circumstances, the commission is also asking companies to ensure they check their constitutions to see whether constitutions permit an AGM to be either held in person or in person/online, but suggests companies entertaining virtual AGMs should obtain legal advice. The commission has taken a no-action position on virtual meetings. However, the regulator does expect members to have reasonable opportunities to participate in proceedings, which includes asking questions.

The government and the regulator have sought to temporarily remove some obstacles to clear, strategic thinking, but the measures outlined above do not absolve directors from considering core financial issues in the lead-up to the end of this financial year.

Going concern

The market needs to know the good, the bad and the ugly — not necessarily in that order. Directors must still consider the issue of going concern. Can the entity they govern pay its bills when they fall due? What are the finance options available for the business if things are tight? The assessment of going concern will need to be reported in the financial statements that will, in many instances, be audited or reviewed. For more information, see Financial reporting during the COVID-19 crisis: what do you do when you have to sign off the accounts?

Loan covenants

Lean times will also necessitate the consideration of any loan covenants that are in place. Is cashflow adequate and how is the business able to service debt? Is the business able to take advantage of any bank initiatives that may assist with cash flow by deferring loan payments? Management will need to be asked what, if any, conversations have been had with banks on financing matters given the current circumstances.

Write-downs?

Accounting considerations that need to be reflected on include asset impairment and what will need to be written down. Directors will need to ask managers whether the valuations reflected in the line items in financial statements are reasonable in the circumstances. This question surrounding valuations also includes getting an understanding of, and being satisfied with, any market or fair values that might appear in the financial statements.

Bad debts

An entity may have suppliers that have not paid what they owe and any amount related to bad debts might need review because an individual or entity may have become bankrupt or insolvent as a result of circumstances beyond their control.

After balance date events

Directors will need to monitor significant activities that take place after the close of the relevant financial year, as there may be developments that will at least require disclosure, if not an adjustment to the financial statements.

Risk management frameworks

It may also be necessary for directors to review the internal controls and risk management frameworks for the company because shareholders and stakeholders may use the AGM to ask whether an entity’s risk management policies and procedures were sufficient to cater for the circumstances the business faced when the pandemic took hold.

This pandemic is a once in a lifetime event and boards of directors are being challenged to make prudent decisions in the interests of a business, but they should not lose sight of the fact that shareholders and other stakeholders will need to have those decisions clearly explained.

Tom Ravlic is a journalist, academic and communications consultant.