COVID-19
Key questions answered by country
Introduction
Coronavirus (COVID-19) is one of greatest public health emergencies in living memory which has raised myriad issues for industry and commerce, and governments and individuals at all levels in their professional and personal capacities across the globe. As a consequence, it is critical for businesses, particularly those with international operations, or those who are domestic in nature but have customers, counter-parties or other stakeholders in other jurisdictions, to understand the key issues raised by COVID-19 across all the countries concerned. As one of the largest law firms in the world, DLA Piper is pleased to present a wide ranging overview of key questions arising in relation to a range of legal and commercial issues by country.
Corporate transactions and corporate governance
Australia
What are my duties as a director and how should I comply with them in the current environment?
Directors of Australian companies have statutory and fiduciary duties that require them, among other duties, to act in good faith in the best interests of the corporation and for a proper purpose. The interests of a company's creditors also become increasingly important under Australian law when the company is experiencing financial difficulty.
The extent to which directors are obliged to take into account other stakeholder interests, such as those of employees, customers, suppliers and local communities, is not finally resolved under Australian law.
Nonetheless, directors should be mindful of other stakeholder interests when deciding how best to direct the actions of their company, and will need to balance carefully the short-term needs of the company against the long term impact of their decisions.
Given the uncertainties surrounding the COVID-19 pandemic, particularly in relation to its duration, it may be difficult for directors to ascertain how their immediate actions may impact on the long-term success of the company and/or its various stakeholders. However, directors can mitigate this risk by ensuring that they act in good faith and in a prudent and reasonable manner based on the information available at the time of making each decision, and by recording decisions made and the key information and factors taken into account when making such decisions. This may extend to documenting any alternative options that the board has considered in making those decisions and the reasons why particular options were preferred or discounted.
How can board members be appropriately protected in the performance of their duties (e.g. health & wellness, indemnification & insurance)?
Directors' and officers' (D&O) insurance is a common means of limiting the personal liability of directors in Australia. D&O insurance typically provides both cover for individual directors against claims made against them in their capacity as director, including defence costs (which applies when indemnification by the company is not available), and company reimbursement when it has indemnified its directors. Policy exclusions typically include claims in respect of a director's fraud, dishonesty, wilful default or criminal behaviour.
There are important restrictions imposed by the Corporations Act 2001 (Corporations Act) on the liabilities that may be indemnified by companies in Australia. Companies are prohibited from providing indemnities, other than for legal costs, in certain circumstances and from providing indemnities including for legal costs in other circumstances. The former prohibition applies to an indemnity against liability incurred as a director, officer or auditor of the company which is:
- owed to the company or a related body corporate;
- for a pecuniary penalty order or a compensation order for a breach of certain provisions (including the insolvent trading provisions); or
- owed to someone other than the company (or related body corporate) and arose out of bad faith.
In conjunction with their brokers, directors should consider whether their existing corporate insurance policies cover the company’s business interruption caused by coronavirus COVID-19 and how such pandemic-related exposure can be effectively mitigated going forwards. That consideration should include an appraisal of existing D&O policies purchased for the directors as individuals as well as any indemnities provided by the company for their benefit, in order to understand the extent to which their own position is protected.
In relation to health and wellbeing, directors, in their capacity as employees, are afforded the same protections as other employees and their health and wellbeing must be safeguarded.
Australia
Does my company need to hold an annual general meeting and, if so, how can I manage the risks associated with a physical gathering (or can my company hold a virtual meeting instead)?
The Australian Securities and Investments Commission (ASIC) has also issued "Guidelines for meeting upcoming AGM and financial reporting requirements". ASIC has adopted a two-month ‘no-action’ position for entities with a financial year end of 31 December 2019 that fail to hold their AGM by 31 May 2020. ASIC's preference is for such entities to hold their AGM by the end of July 2020, but has stated it will review the situation and issue further guidance as necessary.
ASIC also supports entities holding meetings using appropriate technology, whether a wholly "virtual" meeting or a "hybrid" meeting where there is a physical location and also online facilities. ASIC has adopted a "no action" position on non-compliance with provisions of the Corporations Act where an entity holds a virtual AGM in order to comply with the statutory 31 May 2020 deadline (or ASIC's extension period).
However, this is subject to certain qualifications, including compliance with both the entity's constitution and the Corporations Act's requirement that the technology used must give members as a whole a reasonable opportunity to participate.
ASIC has indicated it will be issuing further guidance as necessary regarding financial reporting deadlines for entities with 31 March or 30 June balance dates.
ASIC's "no action" policy will extend to contraventions of the Corporations Act if an entity that has given members notice of a meeting to be held on or before 31 May 2020 sends members supplementary instructions for on-line participation in the meeting. The instructions must be given at least two business days before the meeting date by:
- electronic message (where the member has provided the relevant details);
- a notice on the entity’s website;
- and if the entity is listed, a market announcement.
Certain requirements in the Corporations Act relating to shareholders meetings are not compatible with public health requirements for social distancing during the coronavirus pandemic. In order to facilitate these important corporate functions during this period, on May 6, 2020 the Australian Federal Government introduced the Corporations (Coronavirus Economic Response) Determination (No. 1) 2020. This determination modifies the legislative requirements regarding meetings and execution of company documents (discussed below). These changes came into force on 6 May 2020, and will expire after six months, on 5 November 2020.
General meetings of companies, including AGMs, can now be held as fully virtual meetings. There are certain requirements applicable to the holding of electronic meetings. Please see our alert for further details: Coronavirus: Changes to rules governing meetings and the execution of company documents (Australia).
Does my company need to file annual/audited accounts or are there dispensations?
Companies may face practical difficulties in relation to the preparation and audit of annual accounts. Travel and movement restrictions are likely to mean that staff and external auditors will have much reduced access to company sites and records. Regulators in some jurisdictions are extending deadlines for the filing of accounts. Directors should seek advice from their auditors as to the position in their jurisdiction and, to the extent necessary to benefit from an extended filing deadline, make any necessary applications in a timely manner.
For companies listed on the ASX, the obligation under the Listing Rules to lodge an annual financial report within 3 months of the end of the company's accounting period is not a requirement which ASX has discretion to waive or extend. While certain limited and conditional forms of relief have been granted in the past for listed companies affected by natural disasters, the availability of such relief is a “high bar” and early engagement with ASX is critical to ensure that the company's securities are not suspended from quotation for failure to lodge the annual financial report within the prescribed timeframe.
Companies should also discuss with their auditors whether balance sheet adjustments or post‑balance sheet disclosures should be made in relation to the impact of coronavirus COVID-19. Given the uncertainties surrounding the longevity of coronavirus COVID-19, auditors may have concerns regarding the ability of companies to continue as going concerns and they may wish to make qualifications to the audit. Directors need to consider whether any qualifications to audit (or any material delay in finalising the audit) will trigger an event of default under loan agreements or other adverse consequences for the company.
Are any legislative changes in relation to the striking off or dissolution of companies in place or proposed?
At this point no legislative changes have been proposed or made in Australia in respect of the scope for Australian companies to be struck off or dissolved.
Relevantly for directors of Australian companies however, the Australian Government has passed the Coronavirus Economic Response Package Omnibus Bill 2020 in light of the COVID-19 pandemic. The legislation is designed to lessen the economic impact of COVID-19 as a result of cash flow constraints on Australian companies and reducing the threat that otherwise healthy companies that are now experiencing financial distress as a result of COVID-19 avoid the entry into formal insolvency processes to protect directors from personal liability for debts that the company incurs. The amendments are aimed to reduce the closure of Australian businesses during this uncertain period and avoid company collapses.
The new legislation provides for a relaxation of the application of the statutory insolvent trading provisions under the Corporations Act and effectively provides for a six month moratorium against directors having personal liability where a company trades while insolvent (i.e. trading while the company cannot pay its debts as and when they fall due).
The statutory provisions imposing personal liability on directors for insolvent trading will be held in abeyance so that directors will not be liable for debts incurred by an insolvent company if the debt is incurred during the six month period from 25 March 2020 (or longer period if prescribed) and in the ordinary course of its business during that period. These provisions will operate alongside Australia’s existing “safe harbour” regime.
The legislation is silent on debts incurred other than in the ordinary course of the company's day to day business operations.
What impact has COVID-19 had on the operation of the local companies registry?
ASIC has announced several temporary changes to the scope of its operations in light of the COVID-19 pandemic, including:
- ASIC will focus its regulatory efforts on challenges created by the COVID-19 pandemic. Until at least 30 September 2020, the other matters that ASIC will afford priority are where there is the risk of significant consumer harm, serious breaches of the law, risks to market integrity and time-critical matters.
- ASIC has immediately suspended a number of near-term activities which are not time-critical. These include consultation, regulatory reports and reviews, such as the ASIC report on executive remuneration, updated internal dispute resolution guidance and a consultation paper on managed discretionary accounts.
- ASIC will suspend its enhanced on-site supervisory work.
- Where warranted, relief or waivers from regulatory requirements will also be provided. This will include obligations imposed on listed companies associated with secondary capital raisings and audits. ASIC has already indicated a 'take no action' stance in relation to the timing of AGMs until 31 July and the conduct of AGMs by electronic means.
- ASIC will maintain its enforcement activities and continue to investigate and take action where the public interest warrants it to do so against any person or entity that breaks the law. However, it will focus on action necessary to prevent immediate consumer harm, egregious illegal conduct and other time critical matters.
Key business as usual functions will be maintained including registry operations and services, receipt of whistle-blower, breach and misconduct reports and general contact points for industry.
What should we be taking into account when considering how best to preserve cash in the context of:
- dividends and other corporate actions (e.g. share buy backs); and
- incentive payments for directors / employees
Boards should consider cash management measures as an important tool to support the ongoing operations of the business and maintenance of the company's solvency. If prudent cash management measures are not taken, boards should be mindful of the reputational damage that could be caused, whether this would handicap them in future negotiations with funders and whether this is consistent with their duties and the company's corporate purpose.
We have therefore seen a number of companies defer or cancel dividends and suspend buy-back programmes in order to maximise the amount of cash available to support their core business. These steps should not usually give rise to legal consequences – for example, a company's constitution will typically allow the board to withdraw a recommendation for a final dividend at any time before it is approved by shareholders. Any decision to change dividend policy or buy-back programmes should be announced promptly and the board's reasoning explained clearly.
Boards should also consider what steps they can take now to manage immediate and future incentive plan costs, in particular whether such steps fall within the discretion of the board or remuneration committee under the terms of the relevant plans. Transparent communication with directors and employees is of paramount importance.
Australia
What are our disclosure obligations in the context of the rapidly evolving situation around Covid-19 and its uncertain impact on our business?
In addition to routine financial disclosures, directors need to consider their responsibilities to disclose information in the annual report regarding the impact of coronavirus COVID-19. For example, the annual directors' report for a listed entity must contain information that members would reasonably require to make an informed assessment of the entity's business strategies and prospects for future financial years.
Listed entities must also continue to discharge their obligations under the Act and Listing Rules, including (subject to the application of Listing Rule 3.1A where applicable) continuous disclosure obligations relating to materially price-sensitive information regarding the impact of coronavirus COVID-19. Given the situation is changing rapidly the directors must keep this under regular review and ensure that the company is in a position to make disclosures to the market as required.
Australia
When undertaking M&A, what issues should we be considering given current levels of uncertainty?
Please see our alert Managing coronavirus risks in corporate deals.
For companies that want to access the capital markets, what options are available (and what particular issues will arise) given current levels of uncertainty/volatility (e.g. rescue rights issues, underwriting arrangement, disclosure)?
We have seen distressed companies look to equity markets for fundraising opportunities to bolster their balance sheets (for example through discounted rights issues and emergency fundraisings), particularly given the tightening of debt markets and cash-flow pressures on their business.
A substantial equity fundraising would typically be expected to trigger the requirement for a prospectus. A prospectus must contain all the necessary information which is material to an investor making an informed assessment of certain matters relating to the issuer, its securities and the issuance. Particular attention should be given to risk factors, which must be tailored to the issuer's business and cannot be generic. In conjunction with the issuer's financial advisers it is important therefore to thoroughly diligence the issuer's COVID-19 response and the specific impacts the pandemic has had and is likely to continue to have on its business. This will also be required in order to access underwriting commitments and, from the issuer's perspective, close attention should be given to the conditions and termination events in underwriting agreements.
Australia
To what extent can a MAC/MAE provisions be relied on as a result of issues flowing from COVID-19?
In an M&A context, much will depend on the exact terms of the MAC negotiated by the parties. A "traditional" MAC clause is typically generic and designed to cater for unknown rather than known risks. It will usually exclude material changes resulting from industry-wide or general market factors (e.g. pandemics). Alternatively, a tailored provision may be negotiated which defines specific MAC events to cover the buyer's key concerns (e.g. significant reduction in sales or the loss or insolvency of key customers/suppliers).
In the challenging environment brought about by the COVID-19 outbreak, it is in the interests of all parties to ensure that any MAC conditions or termination rights are clear and tightly drafted. In circumstances where a buyer terminates in reliance on a broad or generic MAC, litigation is likely. A MAC clause is more likely to be successfully obtained (and conceded) if it relates to specific COVID-19 risks identified during due diligence and sets out the means by which such risks can be objectively measured and quantified. Alternatively, if the parties agree that there should be commitment to consummate the transaction notwithstanding COVID-19 risks, then the MAC (if any) should be drafted to expressly exclude such risks.
In light of movement restrictions, can we sign contracts electronically and if so how?
Contracts governed by Australian law can be validly signed electronically provided that any formalities relating to the execution of that contract are satisfied. Such formalities include any statutory formalities such as signing in the physical presence of a witness, and procedural formalities such as only signing complete, final versions of deeds.
Certain requirements in the Corporations Act 2001 (Cth) (Corporations Act) relating to the execution of documents under Australian law are not compatible with current public health requirements for social distancing during the COVID-19 pandemic. In order to facilitate these important corporate functions during this period, on 5 May 2020, the Australian Federal Government introduced the Corporations (Coronavirus Economic Response) Determination (No. 1) 2020. This determination modifies the legislative requirements regarding the execution of company documents (as well as the rules governing meetings of shareholders). These changes come into force on 6 May 2020, and will expire after six months, on 5 November 2020. Please see our alert for further information: Coronavirus: Changes to rules governing meetings and the execution of company documents (Australia). Key takeaways from the determination on execution of documents are as follows:
- “Split execution” (i.e., execution of documents under s 127(1) of the Corporations Act, where directors and/or the company secretary print out and sign separate versions of the same document) is now expressly permitted under the determination, and will allow the statutory assumptions of due execution to be relied upon. This will simplify the document signing process for directors and company secretaries.
- Electronic execution of documents (for example, on document signing platforms) is now expressly permitted under the determination, and will allow the statutory presumptions of due execution to be relied upon.
- The determination does not specify whether it applies to the execution of deeds, however emergency measures have since been introduced by NSW and Victoria permitting the electronic execution of documents such as deeds, and confirming that various documents including deeds and mortgages may now be witnessed via audio-visual link. Other states and territories have not yet updated their positions on the execution and witnessing of deeds, however measures have been contemplated in most states’ overarching COVID-19 legislation.
Workplace relations
Australia
An employer may be able to instruct an employee to stay away from work if it is felt the individual poses a risk and the employer has a reasonable basis for this (for example, coughing, fever, frequent sneezing). Employers must avoid making assumptions based on race or ethnicity to avoid discrimination issues. For example, it would be discriminatory to ask all staff to disclose recent travel, but then only require employees of Chinese/Italian origin to stay at home.
Where an employee is not ill and remains able to work, the employer is unlikely to be able to require the employee to take their paid personal (sick) leave (or unpaid personal leave if the paid leave has expired) and will instead have to continue to pay the employee his or her full pay and ensure that the period of exclusion is for a reasonable period, unless the employee is eligible for unpaid pandemic leave under a modern award (as discussed in the ‘emergency measures’ section above).
If however the employer has tested positive to COVID-19, he or she is unable to work due to illness and can access their paid personal leave (or unpaid personal leave) as normal.
Where an employee is not ill and remains able to work, the employer is unlikely to be able to require the employee to take their paid personal (sick) leave (or unpaid personal leave if the paid leave has expired) and will instead have to continue to pay the employee his or her full pay and ensure that the period of exclusion is for a reasonable period.
If, however the employer has tested positive to COVID-19, he or she is unable to work due to illness and can access their paid personal leave (or unpaid personal leave) as normal.
Australia
Employers can require employees to work from home although they will have to continue to pay them as normal until there is a change in circumstances (such as restrictions being lifted in the future, at which time employers may need to review the reasonableness of the requirement).
Employers also have an obligation provide a safe place and system of work and so, normally, an employer would wish to satisfy itself that the working environment of an employee working at home was appropriate health and safety risks. This is unlikely to be practicable in the current circumstances. A recommended approach is to ask employees who are working at home to let the business know if they have any particular requirements or concerns about health and safety and to deal with matters that are raised on a case by case basis. It will also be prudent to give employees high level instruction such as not sitting for long periods and having normal breaks.
Whether an employer can impose alternative duties to the normal duties of the employee during a working from home arrangement will depend on the scope of the employment contract (unless changes are made in accordance with the JobKeeper provisions outlined in the ‘emergency measures’ section above) – many contracts do allow for a variation in duties or reasonable changes to them. It is likely that an employer will be given more scope from a legal point of view to make sensible changes in the present environment but as always, communication and consultation with the employee is advised including the explanation for the changes. Employers should make it clear that the changes are not permanent and will be reviewed.
Australia
Employers are recommended to agree working arrangements with affected employees based on their personal circumstances.
Paid carer’s leave (part of the personal leave right in Australia) is not legally available where parents choose to or are required to look after their children at home unless it is because the child is ill.
More generally for individuals impacted by the school closures, employers may wish to:-
- assess if an individual is able to work at home – factoring in the age/care requirements of their children and any other child care that might be available to them and whether, for example, reduced or amended hours of work might assist;
- if working at home isn’t an option or isn’t workable, consider if the individual could use annual leave or agree to take a period of unpaid leave.
Australia
In Australia this is commonly referred to as a ‘stand down’. The legislation in Australia allows employers to stand down workers without pay in certain circumstances including where there is a stoppage of work for any cause for which the employer cannot reasonably be held responsible and where the employees cannot be usefully employed in some other way. The stand down can continue for as long as the stoppage of work continues. While the employee is stood down the employment relationship is otherwise maintained.
Those provisions do not apply where there is a stand down provision contained in the applicable contract of employment (which is not typical in Australia) or enterprise agreement (if there is one). In that situation, the employer needs to consider the relevant clause in the enterprise agreement or contract of employment to determine what rights of stand down exist.
Under the legislation however, it is important to note that there must be a stoppage of work, not just a reduction, and that there must be a direct causal connection between the stoppage of work and the absence of useful work in which the employee can be engaged. The stand down cannot occur before the stoppage of work occurs.
Employees will continue to accrue paid annual leave and paid personal leave during the stand down and their continuity of service is unbroken The employer cannot direct the employee to take their paid annual or long service leave during the stand down – the employee must consent. Similarly, the employee cannot insist on receiving such paid leave. Legal advice should be taken before any stand down because the COVID-19 situation is unique in the context of the use of stand down provisions.
Employees should be given letters informing them of stand down and its terms. Whilst the legislation does not specifically require consultation, we recommend that a level of consultation with employees (and union if appropriate) occurs.
Australia
An employer cannot require working hour reductions or salary reductions without an employee’s consent unless covered by a particular modern award that allows them to do so (or unless doing so in accordance with the JobKeeper flexibility provisions) . In these circumstances, to reduce hours or salary, employees will have to be persuaded to agree to any change. For example, an employee may agree to the reduction if the alternative is likely to be the redundancy of their position or that they will be stood down without pay.
Where a cut in pay is being considered, employers must take care to ensure that the reduction does not result in the employee’s pay rate falling below any minimum pay rate they are entitled to under an applicable modern award or enterprise agreement, because even if the employee consents to the reduction it will be unenforceable and expose the employer to a penalty for breaching the award of enterprise agreement.
Other options for reducing staff costs include restricting recruitment, withdrawing job offers (with notice for those already accepted by the employee), deferring new joiners, reducing casuals or labour hire staff.
Financial instruments and transactions
Australia
The Australian Federal Government will guarantee 50% of the value of new bank loans to qualifying small and medium enterprises, to access up to AUD 40 billion in finance. The loans will be in a maximum amount of AUD 250,000 per borrower, with a term of up to three years and with an initial 6 months repayment holiday.
The Australian Federal Government will also allow more flexibility in respect of creditor initiated insolvency and voluntary administration actions, with the outstanding amounts limit being amended from AUD 2,000 to AUD 20,000 and timing to respond being amended from 21 days to six months. Relief for directors while trading insolvent will also be provided over the next six months.
The Governments of different states and territories have respectively offered different kind of financial assistance, such as waiving payroll tax for qualified businesses, providing business support fund to all businesses with a focus on sectors, and providing low interest or interest free loans to qualified businesses.
Australia
As a consequence of COVID-19, will my lenders be able to accelerate my loan or stop me drawing any further loans?
Lenders will be entitled to accelerate loans if an Event of Default occurs. Typical Events of Default that may be relevant in the COVID-19 situation include non-payment, insolvency, financial covenant breach and potentially Material Adverse Effect. Grace periods or materiality thresholds may apply in some cases.
Typically, new loans will not be able to be drawn if a Default occurs. A Default usually includes any event or circumstance which would (with the expiry of a grace period, the giving of notice, the making of any determination or any combination) be an Event of Default; ie. it includes potential Events of Default, as well as actual Events of Default.
You should also consider whether there is a Review Event provision in your credit agreement. The negotiated terms of a Review Event will differ on a case by case basis and could include circumstances such as the aggregate value of assets or revenue falling beneath an agreed threshold.
Typically, if a Review Event occurs, you will need to notify the agent upon becoming aware of that event, it may be the case that new loans cannot be drawn and the lender or majority lenders can, by notice, accelerate the loan.
What flexibility do I have under my financial covenants?
Borrowers should carefully consider the terms of the financial covenants and related definitions in their facility agreements on a case by case basis.
In particular, you should consider (a) what adjustments can be made to EBITDA in connection with COVID-19, for example are there costs that could be excluded as Exceptional Items or can you adjust for cost savings or cost synergies; (b) are there any specific mechanisms in the financial covenants allowing for one off adjustments for significant events, for example shock adjustments in the travel sector and (c) what equity cure rights are there to allow for additional shareholder investment to cure any failures to comply with financial covenants.
What is the process if I need any amendments or waivers under my finance documentation (including in respect of financial covenants)?
You will need to consider what proportion of your lenders need to consent to the requested amendment or waiver, i.e. all lenders or majority lenders (typically 662/3%) or if there are any other exceptions.
Amendments to the financial covenants tend to require majority lender consent, but this should be reviewed on a case by case basis.
As a practical point, in our experience, lenders tend to be more receptive to requests for amendments and waivers if a borrower presents to them well thought out and reasoned plans to address any issues in the business; i.e. solutions not just problems.
Australia
If I can’t comply with the terms of my bond covenants, who do I need to notify?
If a default has occurred or is likely to occur, communication with bondholders will often be required through a combination of:
- communication through the clearing system on which the bonds are cleared. For Australian Dollar bonds this would Austraclear or in some cases, Euroclear/Clearsteam. These communications are usually effected by the Trustee or payment agents on behalf of the Issuer;
- public announcements filed on the exchange where the bonds are listed and the issuer's website; and
- notice to the trustee or fiscal agent (as determined by the governing document of the bonds).
Most Australian dollar bonds share covenant packages of other creditors of the Issuer including syndicated debt holders under a common terms agreement or deed. The types of covenants will be similar to those applicable for bank loans.
Australian dollar bonds issued by investment grade issuers generally have very limited covenants particular those that follow Eurobond style documentation. These include issuers that have established an EMTN programme with an AMTN extension allowing Australian dollar bonds to be issued off their EMTN programme. For high yield issuers, the spectrum of covenants agreed to by Australia dollar bond issuers is very diverse and ranges from limited financial covenant structures to American style high yield bonds with covenant lite structures (i.e. incurrence based covenants which only require performance if the Issuer wants to do something such as borrow money, dispose of assets, distribute dividends, make investments, etc. Poor performance won’t trigger an Event of Default under these types of covenants).
If I need to ask for a waiver or amendment to the terms of bonds issued by my business, what steps do I need to take?
Key default concerns for bonds whether they are investment grade, high yield or those which does not fall into the high yield category during the near term are likely to be:
- cross default/cross acceleration of other debt of the Issuer;
- judgement debt above a certain threshold, cessation of business and insolvency; and
- inability to pay interest or principal.
Bonds will also typically have reporting obligations to the Trustee including obligation to notify of potential and actual Events of Default, delivery of compliance certificates and provision of financial statements. However, breaches of these covenants only result in a technical breach and won’t become an Event of Default unless the Trustee by written notice demands rectification and the Issuer fails to comply with such notice.
It should be noted that Bonds are often listed on a stock exchange and the relevant stock exchange will require the Issuer to make public certain price sensitive information including material developments in its business as well as anything known to the Company which could have a material impact on the price of the Bonds listed on such exchange. The effect of COVID-19 on the Issuer may trigger such disclosure obligation.
What is the process for contacting bondholders and holding meetings to agree changes in the terms of my bond documents?
Governing documents for bonds will usually have a detailed waiver and amendment procedure spelled out. It should be expected that bondholders representing a majority of principal amount outstanding will be required for amendments to non-economic terms (such as ability to incur additional debt), but that economic terms (maturity, interest rate, interest payment dates currency, etc.) will require 75% to 100%, depending on bond documentation. Changes to collateral security arrangements may also require supermajorities. The relevant thresholds for bondholder consent will be contained in trust deed of the bonds.
As a matter of first instance, an issuer should have counsel review the amendments and waivers section of the bond documentation, as well as to seek advice of counsel regarding prudent public communications under applicable securities laws and regulations.
Supply chain resilience, commercial contracting and privacy
Australia
If we have a right to terminate for a continuation of a force majeure event, but are continuing to work with a supplier/customer to try to implement a work around/alternative solution, will we (and at what point) be considered or deemed to have waived or elected not to exercise that termination right? Can we preserve that right?
Under Australian law, a right to terminate must generally be exercised within a ‘reasonable time’ based on the particular circumstances – this is likely to be in the range of several weeks rather than several months. In particular, regard should always be had to the terms of the contract in question, including the definition of force majeure event and notification requirements regarding a force majeure event.
A party may issue written confirmation that any discussions and activities about exploring work arounds or alternative solutions are without prejudice to its termination rights may be beneficial in helping to preserve the right to terminate for a longer period than if there is no written confirmation, but the period for which the right may be preserved will still be limited.
Parties should also be careful not to take any action that demonstrates that it has elected to continue the contract and renounce its rights to terminate. Again, issuing a written notice disclaiming any such election can be of some use.
No waiver/no election clauses in contracts, while helpful in evidencing the intention of the parties, are not determinative and courts will look at the factual circumstances in determining whether the right a right to terminate is available.
How do business continuity and disaster recovery provisions apply to the COVID-19 situation and where there are government mandated lockdowns of business?
The application of business continuity and disaster recovery provisions will depend on how those provisions are drafted. Clauses evoking business continuity or disaster recovery provisions may specify events such as pandemics, epidemics and work stoppages (including where this is a government mandated lockdown), and if so, there may be possibility to argue that the business continuity and disaster recovery provisions will be applicable in the current situation.
Organisations should also consider how the outbreak is being classified by bodies such as the World Health Organisation or Australian Governments at the time they are seeking to invoke the force majeure clause, as this may support (or not) an argument or claim.
How can I mitigate exposure to e.g. fixed costs with my suppliers, if they are no longer providing a full service?
This will depend on the provisions of the specific contractual arrangements, but it is common for customers to be able to suspend payment, or not otherwise be responsible for payment, if they are no longer receiving the services as a result of a Force Majeure Event. However, where a customer is still receiving part of the services, the fees associated with that part of the service will generally be unaffected.
From a commercial perspective, we are seeing parties working collaboratively to seek to mitigate their collective exposure to such costs and parties should be encouraged to engage in open and productive dialogue at the earliest possible opportunity. Any such arrangements, if agreed, should be documented in writing.
What steps should I be taking to ensure the resilience of my relationships with key technology and supply chain partners?
Organisations should be having regular conversations with their key technology and supply chain partners. This is an unusual situation, and most partners will be seeking to ensure that relationships continue and are able to be continued once the crisis passes.
Some steps that organisations may consider taking to assess the resilience of their supply chain include:
- identifying key supplier relationships, and undertaking ‘health checks’ of these suppliers by reviewing and monitoring their financial viability and having regular conversations with the supplier account management team;
- reviewing the terms of their agreements with key suppliers, including any key provisions which would oblige key suppliers to notify the customer of underlying issues;
- reviewing and scenario testing BC/DR strategies, including evaluating the security implications of invoking BC/DR;
- re-evaluating concentration and country risk; and
- reviewing what measures are in place around the retrieving customer data.
What will the impact be on RFP processes and transformation programmes and who bears the risk of this?
The impact of COVID-19 and the measures implemented by governments on the particular RFP process will depend on the process itself and how far it has been progressed, but in all likelihood, the risk is likely to be around delay and that is likely to be borne by customers as ordinarily no contracts have been signed.
For transformation programmes, the risk will depend upon the impact of COVID-19 on the particular programme or activity. Some technology-based projects may still be able to go ahead; however, they may be delayed as providers may be focussed on ensuring current processes can support changing ways of working.
The risks associated with the impact of COVID-19 on transformation programmes will be, in many cases, shared between parties to some extent, as a result of provisions around business interruption, supplier relief for customer delays, disaster recovery and force majeure.
What are the impacts of COVID-19 and working from home/remotely on outsourcing arrangements (including e.g. in regulated sectors such as financial services)?
Many outsourced services are delivered from locations outside Australia and may involve remote access to and use of IT systems and information of the customer. The contractual arrangements for outsourced services ordinarily include detailed provisions about information security that, amongst other things, require the outsourced service provider to deliver services from controlled delivery centres of the service provider, without envisaging working from home models (and, if they do envisage working from home models, such models may need to be re-assessed in light of COVID-19).
As customers and suppliers alike are having to adapt to working from home arrangements, customers and suppliers must work together to assess whether this is possible, taking into account both the immediate challenges and longer-term objectives and requirements.
While APRA has not given any specific guidance on the impact of COVID-19 on its prudential standards (including CPS 231 (Outsourcing), CPS 232 (Business Continuity Management), CPS 234 (Information Security) or CPS 220 (Risk Management)), organisations in the financial services sector should take the requirements of these prudential standards into account in considering what steps to be taken, particularly in the context of implementing work from home arrangements in locations outside Australia. In addition, APRA-regulated institutions should also review and consider enacting and implementing the policies and processes that they are required to develop, implement and maintain under those prudential standards.
Australia
Can my organisation share information with other organisations (customers/suppliers particularly) about our employees who have tested positive for COVID-19, where our employees may have been in contact with employees of those other organisations? If so, how can that be done and what are the limitations/restrictions?
Yes, organisations can collect and share with other organisations information (including health information) about employees who test positive for COVID-19, but the information should only be shared on “need to know basis” and organisations should consider how much information needs to be disclosed (for example, it may not be necessary to identify the individual by name).
While health information can generally only be collected and used with consent, and where necessary for the purposes of the organisation, it can also be collected and used where “a permitted general situation” (as defined in the Privacy Act) exists in relation to the collection or use or disclosure (as applicable) of the information by the organisation.
A ‘permitted general situation’ exists where (and noting this is just one of the circumstances included in the definition) it is unreasonable or impracticable to obtain the individual’s consent to the collection, use or disclosure of their personal information, and the organisation reasonably believes that the collection, use or disclosure is necessary to lessen or prevent a serious threat to the life, health or safety of any individual, or to public health or safety.
While the risk of COVID-19 infection poses a serious threat to life, health and/or safety of others and/or a serious threat to public health, as evidenced by the measures being taken by governments around the world, whether it is “unreasonable or impracticable” to obtain consent to the collection and use of health-related information will depend on the facts. It may be that the consent can be obtained from the employee when they report their results, or in other instances, it may be that the result is reported to the employer by a third party (family member, public health body or similar). Whether the “general permitted situation” exemption from the consent requirement is available therefore depends on the factual circumstances.
In any event, as noted earlier, employers should take care to limit how much information that collect and share with other organisations.
What privacy issues may arise by allowing our personnel to work from home? How can we manage these?
Privacy issues that may arise from allowing working from home arrangement may include personal devices being used for work purposes, and printing and devices being visible to family members and others in the home, which creates the potential for personal information of employees, customers and other third parties to possibly be disclosed or used in a manner that is different to those notified to those individuals under privacy policies or contracts with those individuals.
It is possible to manage these issues by ensuring employees receive clear instructions in relation to maintaining security and confidentiality of personal information (along with other information relating to their work), acknowledging that working from home may involve use of different technologies. Some measures may include:
- equipping employees with equipment (whether it be laptops, other portable technologies or virtual desktops over a secure connection) to enable them to work from home in a manner that provides the same level of technological security as the IT environment in which personal information would usually be handled;
- refreshing employees on policies and processes relating to confidentiality and security of information; and
- providing specific guidance and reminders including that documents and any physical papers are to be kept in a safe place.
Can I check the temperature of workers/visitors of my factory site?
The temperature of workers and visitors can be taken and other health information collected from individuals, provided that it is held in accordance with the organisation’s privacy policy and where consent is provided to the collection of information.
It is less likely that an organisation could rely on the ‘permitted general situation’ as the basis for collecting this information, since the individuals must be physically present to have their temperature taken and so it is difficult to make a case that it is “unreasonable or impracticable” to obtain the individual’s consent to the collection of their personal information.
Organisations should also take care to limit how much information they collect and hold, and for how long they hold it. For example, such information should only be held for a short period of time (ie, a matter of weeks) in order to facilitate contact tracing if necessary to do so and afterwards the information should be securely destroyed. This information can also be included on any collection notice and consent form to provide transparency to individuals about how their information will be used.
Can I ask employees whether they have visited “risk countries” or have been in contact with infected persons?
Yes, employers can ask employees for information about their travel history and their interactions with any infected persons, if the employees are working in an environment where they are potentially physical interacting with other personal. This information would not be relevant if the employees are working from home where they are not interacting with others.
The information should be held in accordance with the organisation’s privacy policy and ideally the employees should be asked to consent to the collection and use of this information.
Organisations should also take care to limit how much information they collect and hold, and for how long they hold it. For example, such information should only be held for a short period of time (ie, a matter of weeks) in order to facilitate contact tracing if necessary to do so and afterwards the information should be securely destroyed. This information can also be included on any collection notice and consent form to provide transparency to individuals about how their information will be used.
Am I allowed to share the name of infected employees with other staff as a measure of prevention?
Organisations can collect and share information about employees who test positive for COVID-19, but the information should only be shared on a “need to know basis” and organisations should consider how much information needs to be disclosed. Often it is not necessary to name a specific individual, so organisations should carefully consider whether that level of disclosure is necessary.
See our answer to the question “Can my organisation share information with other organisations (customers/suppliers particularly) about our employees who have tested positive for COVID-19, where our employees may have been in contact with employees of those other organisations? If so, how can that be done and what are the limitations/restrictions?” for more information about ‘general permitted situations’ under the Privacy Act and the extent to which that may allow employers to collect and use information about employees affected by COVID-19.
Organisations should also take care to limit how much information they collect and hold, and for how long they hold it. For example, such information should only be held for a short period of time (ie, a matter of weeks) in order to facilitate contact tracing if necessary to do so and afterwards the information should be securely destroyed. This information can also be included on any consent form to provide transparency to individuals about how their information will be used.
Disputes, Regulatory and Government Affairs
Australia
What is the status of the major courts or arbitral institutions in Australia? Are they operating as usual, and if not what alternative procedures are in place?
All courts have ceased operating as usual. They have implemented a number of measures (which are under constant revision) as follows:
- All trials (save for urgent ones) are being “pushed back” into the second half of the year;
- Those trials considered urgent (including criminal trials) are being conducted with strict social distancing measures in place, and “virtual” trials are being mooted (use of A/V etc);
- Case management conferences and directions hearings are predominantly being conducted on the papers, by telephone, via A/V link or through “Online Courts”; and
- Court ordered mediations are being conducted by Zoom and similar systems.
Am I required to attend a hearing in person at this time in Australia?
This will be up to the trial judge, and pre-trial directions will be made. Largely, attendance at court in person is not presently required. There are multiple examples of hearings and trials being conducted via online platforms.
What, if any, alternative procedures are in place, for filing documents in the local courts in Australia (including but not limited to for the purpose of commencing claims)?
Most courts use online filing systems, and this is encouraged. Some court registries remain open; however, this may not be the case for long.
Given there are significant local movement restrictions, are there any new or alternate procedures in place for the purpose of serving documents on the other party?
Many courts have not yet responded to the challenges and risks arising from personal service. Some courts will permit personal service by registered post. Otherwise, the usual rules of service apply.
Given office closures, how do we ensure we are aware of documents being served on us?
There are a few practical steps that can be taken to minimise the risk of documents unknowingly being served. These include displaying in a prominent position at the entrance to the office an alternative address for service, utilising a Post Office Box or arranging a mail redirection service.
Australia
What are the major considerations if we need to issue a claim?
The usual considerations for commencing a claim continue to apply. For example, any threshold or limitation issues remain unaltered by COVID-19. Nonetheless, there are unique issues and challenges in play necessitating a consideration of additional matters including:
- the additional time that might be required to “issue” proceedings – both at the filing stage and at the service stage;
- the prospect that a significant period of time will elapse before the first directions hearing;
- the potential for greater uncertainty about the prospects of enforcing any judgment or settlement achieved by the intended claim, reflecting uncertainty on the future economic outlook; and
- how litigating in the midst of a global pandemic might be perceived by others, and the reputational consequences that might flow from this course.
If a document needs to be signed by someone who is incapacitated, what do we do?
If a person is incapacitated, they should not sign or purport to sign a document. There are a few enquiries that ought to be made to assess how best to proceed. In particular:
- has the incapacitated person previously appointed a Power of Attorney; and/or
- does the document genuinely need to be signed or can the requirement for the document to be signed be relaxed or dispensed with (most Courts are accepting unsworn documents for now on the basis that sworn documents will be filed later).
If the above enquiries do not resolve the position, an application can be lodged with the relevant State’s Tribunal for the appointment of an administrator or guardian (who would have the capacity to make decisions and sign documents on behalf of the person who is incapacitated).
How are decision-makers (e.g. courts, arbitral institutions etc) approaching requests for extensions of time and hearings?
There is presently no uniformity in the approach adopted by Courts and any request will be considered on a case by case basis.
Courts are understanding of the unique challenges presented and a lot of latitude is being given.
What duties of care do I owe to my customers and suppliers?
The overarching duty of care owed to customers and suppliers is to take reasonable care to avoid the foreseeable risk of harm to customers and suppliers. What this requires in practical terms depends upon the nature of the business and the way business is conducted.
Steps that parties may wish to take include:
- adjusting the way they interact with customers and suppliers to reduce the incidence of face to face contact; and
- regularly cleaning business premises and providing equipment such as sanitiser, face masks and gloves.
Can I rely upon economic hardship as a basis for termination?
There is no common law concept of termination of contract for economic hardship in Australia. Similarly, at a general contractual level, economic hardship is not a recognised or commonly used basis for termination of contracts in Australia. That said, there are elements of economic hardship that may be relevant to the operation of other more commonly used contractual termination rights (such as material adverse change clauses).
Can we terminate our contract due to COVID-19 concerns? What are some of the relevant considerations?
In short, it will depend on the rights afforded to under the relevant contract. The specific drafting and construction of the clauses in your contract will need to be closely considered.
Force Majeure clauses
In Australia, there is no implied concept of force majeure. Whether the concept of force majeure can be relied upon will depend solely on whether the contract provides an express right to do so. The inclusion of a force majeure clause allows contracting parties to agree to the occurrence of certain events which excuse a party’s performance of its contractual obligations and can, accordingly, prevent the contract from becoming frustrated. The scope and effect of the force majeure clause in your contract is dependent on its construction and drafting. There are key considerations a company should make before declaring a force majeure event including, its scope (e.g. what events does it cover), reasonable foreseeability of the event leading to force majeure declaration, notification requirements, and whether there are obligations to mitigate the consequences of a force majeure event.
Doctrine of Frustration
The doctrine of frustration is recognised under Australia’s common law. The doctrine of frustration operates to automatically terminate a contract when performance of the contract becomes impossible, with neither party being at fault, and in circumstances where the obligations under the contract are radically different to those that were contemplated by the parties to the contract. The effect will be that all future obligations by both parties are discharged. Under this concept, it may be difficult for a party to recover payments made before the frustrating event as the common law holds a severe position that “losses lie where they fall”. Whether the doctrine of frustration applies will depend on the particular individual circumstances of each case.
Material Adverse Change clauses
Material Adverse Change (MAC) clauses are a contractual concept and are commonly seen in financing agreements or M&A agreements. A MAC clause is usually drafted as a conditions precedent or a right to terminate, so that if there has been a ‘material adverse change’, then a party may have rights to invoke the MAC clause to stop the contract progressing to signing or terminate the contract, respectively. Whether or not a MAC clause can be relied on in circumstances arising as a result of the COVID-19 pandemic will depend on the specific drafting of the MAC clause.
ADR options
If a contractual dispute arises as a result of the COVID-19 pandemic, there may be dispute resolution mechanisms available to resolve them. Many commercial contracts contain alternative dispute resolution (ADR) clauses, and these mechanisms may require an expert consultant, mediation, or arbitration process, or a combination of some, or all of these processes. Mediation is the most common form of ADR as it is a confidential, informal process where an independent mediator assists to cause a discussion between you and the other party to consider the disputed issues and options available, with an aim to reach an agreement. An expert consultant process will usually involve an independent person, that is an expert in the industry, to make a decision on behalf of the parties. Arbitration will involve parties presenting arguments and evidence to an independent third party, who will then make a determination. Looking to your contract for dispute resolution mechanisms may help you resolve your dispute out of court or tribunal. However, courts and tribunals also provide a more formal ADR process and these processes are often required to be undertaken by parties before a matter proceeds to a hearing.
Australia
My company wants support with the manufacture of ventilators and/or other medical devices, what are the regulatory requirements that we should be aware of?
The Australian Government is progressively implementing various exemptions/exceptions to its various regulatory requirements for medical devices that are used for the diagnosis, confirmatory testing, prevention, monitoring, treatment or alleviation of COVID-19 (including ventilators). On 24 March 2020, the ACCC gave notice granting interim authorisation to relax the ability of medical technology companies to coordinate on ventilator supply:
What are my duties under health and safety law in relation to those employees working from home?
Irrespective of the location where an employee is working, the employer must ensure, so far as is practicable, the health and safety of the employee. When working from home, this typically means that an employer must take reasonably practicable measures to satisfy itself that the employee has a safe workspace and access to safe and appropriate tools and equipment to perform their duties.
Do I need to RIDDOR report any cases of Covid-19 in my employees?
Employer reporting of cases of COVID-19 would only be required where the COVID-19 was contracted at, or via, the workplace. If so, employers would likely be required to notify workers compensation insurers and work health and safety regulators. In both instances, this is regulated at a State and Territory level.
If my premises have been forced to close, and I have a premises licence, are there any steps that I should be taking?
A governmental direction to close licensed premises does not result in a diminution of any legal liabilities as a licensee, as an occupier, or as a landlord/renter. A licensee must ensure compliance with the strict controls placed on them or else face significant consequences: https://www.abc.net.au/news/2020-03-31/victoria-coronavirus-cases-rise-firearm-ban-fitzroy-pub-fined/12105046
To the extent that a licensee has ongoing supply chain and overheads liabilities, now would be the time to explore a renegotiation of terms. The “we are in this together” approach may appeal to business partners who may appreciate that getting something now and something later is a better outcome than strictly enforcing contractual terms and driving you out of business and getting nothing at all.
What health and safety considerations should I have in mind in relation to those employees who continue to attend the workplace?
Employees should only be continuing to attend the workplace where they cannot work from home. If this applies, the employer must take all reasonably practicable steps to ensure the health and safety of the employees while at work and in their travel to and from work. This includes ensuring that Government mandated social distancing measures are implemented. In addition, employers should ensure there are adequate hand washing facilities and appropriate resources (hand sanitiser, disinfecting wipes etc) available to employees. Where an employee is interacting with customers or suppliers, the employer must also ensure those interactions are safe, such as by providing gloves and/or requiring those customers to comply with social distancing measures.
Australia
What is the impact on merger control reviews and timings?
The Australian Competition and Consumer Commission (ACCC) will continue to consider proposed mergers and is not currently asking parties to delay requests for merger clearance. However, it has said that timelines for some reviews/applications (including those with statutory timeframes) may need to be extended if there are challenges in conducting and completing the necessary inquiries with merger parties and market participants due to COVID-19. The ACCC has encouraged merger parties to consider whether their request could be postponed and asks that merger parties update the ACCC on a regular basis regarding any changes in the commercial timing of mergers under consideration and/or changes in the likelihood that these mergers will proceed under current market conditions.
The ACCC has said that, if the situation worsens, it may need to revisit this approach.
At the same time, the ACCC has recognised that some reviews will need to be conducted on an urgent basis.
Does merger control still apply if buying a distressed business or a company in administration?
Yes, merger control still applies.
A ‘failing firm’ argument may be available when buying a distressed business or a company in administration. That is, it may be arguable that the merger will not be anti-competitive because the firm will fail unless the proposed merger proceeds (as there are no alternative buyers resulting in no or fewer competition concerns).
The ACCC has said it will assess merger proposals related to concerns and uncertainty regarding the ongoing financial health of firms on a case-by-case basis. In doing so, it has said it will take into account not only the present situation but also the longer term impact on competition of any change in the structure of markets – that is, it will look beyond the current impact of the crisis on the profits and share value of the merger parties.
Nonetheless, we would anticipate the ACCC will be more receptive to ‘failing firm’ arguments where the assets of the ‘failing firm’ will exit in the event of failure (rather than being disseminated across the remaining players), particularly where the merger parties are consumer facing.
Will competition and antitrust law be relaxed to allow companies to coordinate more to allow them to manage the crisis?
Companies wanting to coordinate to better manage the COVID-19 can apply to the ACCC for urgent interim authorisation on the basis that this conduct will deliver public benefits that outweigh any anti-competitive detriments. The ACCC is granting urgent interim authorisation applications to allow coordination between competitors that is ordinarily prohibited but which is necessary and in the public interest at this time on an extremely expeditious basis. To date, the ACCC has granted urgent interim authorisation to allow:
- supermarkets to coordinate with each other when working with manufacturers, suppliers, and transport and logistics providers;
- the Australian Banking Association (ABA) and banks to work together to implement a small business relief package that will allow for the deferral of principal and interest repayments for loans to small businesses, in all sectors impacted by the COVID-19 pandemic;
- the ABA and banks to also co-operate to provide supplementary relief packages for individuals and businesses affected by COVID-19;
- medical technology companies to work together to coordinate the supply and potential manufacture in Australia of ventilators, testing kits, personal protective equipment and other medical equipment needed to deal with the COVID-19 pandemic;
- wholesalers of medicines to co-operate to facilitate distribution of essential medication and pharmacy products;
- businesses to co-ordinate the supply, inventory management, distribution, logistics, and import of pharmaceuticals needed by consumers and hospitals; and
- Regional Express to coordinate flight schedules with Virgin Australia and Qantas Airways on ten important regional flight routes and to share revenue from providing services on the routes during the COVID-19 pandemic, on condition the airlines charge fares no higher than those in place on February 1, 2020 (so they cannot coordinate pricing).
Will government subsidies made available to support businesses through the crisis be subject to the usual state aid rules?
Australian competition law does not include state aid rules.
What have the competition authorities said about how they will operate during the outbreak?
The ACCC has said it is re-focusing its efforts to prioritise competition and consumer issues arising from the impact of COVID-19. In addition to those matters outlined above, the ACCC will:
- enhance its efforts to address any behaviour by businesses which seeks to exploit the crisis either to unduly enhance their commercial position or harm consumers;
- educate businesses about their obligations in relation to cancellations, refunds and suspension of services as a result of COVID-19;
- raise awareness of COVID-19 scams;
- prioritise its activities in relation to ‘price gouging’ conduct for essential products;
- focus on affordability issues in sectors such as energy, communications and petrol;
- in its enforcement activities, seek to minimise the regulatory burden as far as possible, including by carefully considering the impact on businesses already under pressure when making decisions about the scope and timing of statutory notices for the production of information and documents, and minimising the use of compulsory examinations.
Property leasing, sales and development
Australia
Is the tenant of a lease entitled to suspend rent payments in light of the COVID-19 crisis?
On 29 March 2020, the National Cabinet agreed to a short term (six-month), temporary moratorium on eviction for non-payment of rent to be applied across commercial tenancies impacted by severe rental distress due to coronavirus. Tenants and landlords were encouraged to agree on rent relief or temporary amendments to leases. The National Cabinet has also considered rent waivers and tenant termination on the grounds of financial distress as viable principles. However, landlords and tenants that are not significantly affected by the COVID-19 crisis are expected to honour their lease agreements. States have also introduced legislative changes to increase the scope of regulation-making power – particularly in relation to leasing.
On 3 April 2020, the National Cabinet met and proposed further measures in relation to commercial tenancies. They have agreed that a mandatory code of conduct (Code), guided by certain principles, should be developed and legislated by the States and Territories where tenants are eligible for the Commonwealth Government’s JobKeeper assistance and is considered a small or medium enterprise (less than AUD 50 million turnover). The principles that guide the Code will include that:
- rent should continue to be paid, and where there is financial distress as a result of COVID-19 (for example, the tenant is eligible for assistance through the JobKeeper program), tenants and landlords should negotiate a mutually agreed outcome;
- there will be a proportionality to rent reductions based on the decline in turnover to ensure that the burden is shared between landlords and tenants; and
- there will be a freeze on rent increases (except for turnover leases).
It is expected that details of the Code will be available in coming weeks.
Separately, landlords may be required to pay retail tenant’s compensation for business disturbance if the closure is unrelated to COVID-19. For instance, states such as ACT, NSW, NT, QLD, SA, and VIC all have provisions requiring landlords to pay such compensation, except where the closure is a reasonable response to an emergency. WA and TAS have similar requirement as the other states, however, do not have an equivalent exception.
It is unlikely that tenants will be able to suspend rent payments under common law, as a short-term change will not necessarily be enough to satisfy the frustration requirements.
Beyond this, the individual lease will need to be considered, and the circumstances of the tenant if the proposed Code or current (or proposed) legislative changes do not apply to them. Whilst some leases may contemplate infectious diseases, frustration or force majeure, many leases remain silent on these issues. In Australia, it is common for a lease to include a clause which allows the tenant a rent abatement in the event the Premises is substantially and/or materially damaged or destroyed. However, it is unlikely that these clauses will apply to a pandemic.
Is the tenant of a lease entitled to terminate the lease in light of the COVID-19 crisis?
Possibly. Whether a party can terminate will depend on:
- the drafting of the relevant force majeure clause (if any);
- the application of the doctrine of frustration to the circumstances of the tenant; and
- the application of any state-based legislation.
At common law, frustration is difficult to prove, as the party must demonstrate that radical changes have caused a fundamentally different situation than what was initially anticipated. This may include following situations:
- changes of law;
- a crucial event not occurring; or
- impossibility of performance.
A short-term change will not necessarily be enough to satisfy the frustration requirements. By analogy, a Hong Kong court rejected a tenant’s claim that a tenancy agreement was frustrated due to an isolation order pertaining to the SARS outbreak which meant that it could not be inhabited for ten days. Similarly, circumstances which may have the effect on performance under a contract becoming slightly more expensive or onerous may not be enough to resist performance of the contract.
Do the measures (laws, orders, regulations, etc.) taken by the national government or any other competent public authority in light of the COVID-19 crisis trigger any additional obligations on landlords, or release landlords from any obligation?
Like any other business, landlords must comply with the safety & health requirements imposed under the COVID-19 measures. This includes the closure of premises and strict social distancing. So far, measures have mainly been prohibitive as opposed to creating any positive obligation. Having said this, governments have encouraged landlords and tenants to reach some form of agreement e.g. for rent abatement.
The Code proposed by the National Cabinet for adoption by the States and Territories is expected to impose the following additional obligations on landlords:
- a proportionality to rent reductions based on the decline in turnover of the tenant’s business to ensure that the burden is shared between landlords and tenants;
- a prohibition on terminating leases for non-payment of rent (i.e. lockouts and eviction);
- a freeze on rent increases (except for turnover leases);
- a prohibition on penalties for tenants who stop trading or reduce opening hours;
- a prohibition on landlords passing land tax on to tenants (if not already covered by legislation);
- a prohibition on landlords charging interest on unpaid rent; and
- a prohibition on landlords making a claim in respect of a bank guarantee or security deposit for non-payment of rent.
What should a landlord do to protect its legal position in light of tenants who ask for rent reduction or the suspension of rent payment obligation?
In the first instance, we recommend that landlords read the terms of their lease and any insurance they have taken out or require the tenant to take out (e.g. for business interruption or loss of rent).
For insurance policies that contemplate loss of rent or business interruption, landlords should ensure that any agreements to abate or suspend rent payments do not invalidate or prevent claims under the policies given these commonly apply to default/termination and not a landlord concession (such as an abatement or incentive) granted to a tenant.
Given that the moratorium on leases will prevent landlords from evicting tenants, landlords may want to consider reaching out to their tenants and offering a temporary amendment of the lease agreement which reduces or temporarily suspends rent. Such an agreement should be made in writing and carefully drafted, in order to prevent any uncertainty around the landlord’s legal position to insist on the continuous fulfilment of the lease.
For landlords and tenants that sign up to the Code, the Australian states and territories have agreed to look at providing the equivalent of at least a three-month land tax waiver and three-month land tax deferral for applications by eligible landowners, with jurisdictions to continue to monitor the situation. Landlords must pass on the benefits this policy to their tenants. Where parties have signed up to the Code, the ability for tenants to terminate leases as mentioned in the National Cabinet Statement on 29 March 2020 will not apply. Mediation will be provided as needed through existing State and Territory mechanisms.
If the Code does not apply, landlords can consider exercising other rights or varying the lease to preserve its commercial rights for recover of any non-payment of rent, or any tenant requests for a deferral or abatement of rent.
Depending on past practice of issuing and sending invoices for rent, the landlord should be careful not to give tenants the opportunity to claim an implicit waiver to the right to receive a rent payment
Are there any emerging market position/recommendations from professional bodies with respect to landlords granting flexibility to tenants?
This is subject to change as more details emerge from the National Cabinet and finalised legislation. Professional bodies that provide good general guidance include:
- ACCC (for dealing with consumers) – link;
- ASIC – link;
- Australian government (Business) – link;
- Australian government (Essential Information) – link;
- FIRB – link;
- Franchise Council of Australia – link; and
- Prime Minister of Australia (Media) – link.
We have otherwise set out above details of the particulars of the proposed Code by the National Cabinet.
Do the COVID-19 measures taken by the national government or any other competent public authority allow the landlord to invoke force majeure and avoid the payment of penalties or other contractual remedies foreseen under a forward lease agreement in case the agreed delivery dates are at risk to be missed?
Possibly.
Contractual arrangements between parties may supersede the doctrine of frustration and any relevant state-based legislation, insofar that these obligations can be contracted out of.
If any new legislation were to be introduced, the legislation may be considered an act of force majeure or frustration itself.
Nevertheless, it is likely that any legislative changes will override existing obligations. This is because leases often provide that the tenant and landlord must continue to obey the law – however, this matter could be contentious.
Leases (tenants/corporate occupiers perspective)
Is the tenant of a lease entitled to suspend rent payments in light of the COVID-19 crisis?
On 29 March 2020, the National Cabinet agreed to a short term (six-month), temporary moratorium on eviction for non-payment of rent to be applied across commercial tenancies impacted by severe rental distress due to coronavirus. Tenants and landlords were encouraged to agree on rent relief or temporary amendments to leases. The National Cabinet has also considered rent waivers and tenant termination on the grounds of financial distress as viable principles. However, landlords and tenants that are not significantly affected by the COVID-19 crisis are expected to honour their lease agreements. States have also introduced legislative changes to increase the scope of regulation-making power – particularly in relation to leasing.
On 3 April 2020, the National Cabinet met and proposed further measures in relation to commercial tenancies. They have agreed that a mandatory code of conduct (Code), guided by certain principles, should be developed and legislated by the States and Territories where tenants are eligible for the Commonwealth Government’s JobKeeper assistance and is considered a small or medium-sized enterprise (less than AUD 50 million turnover). The principles that guide the Code will include that:
- rent should continue to be paid, and where there is financial distress as a result of COVID-19 (for example, the tenant is eligible for assistance through the JobKeeper program), tenants and landlords should negotiate a mutually agreed outcome;
- there will be a proportionality to rent reductions based on the decline in turnover to ensure that the burden is shared between landlords and tenants; and
- there will be a freeze on rent increases (except for turnover leases).
It is expected that details of the Code will be available in coming weeks.
Separately, landlords may be required to pay retail tenant’s compensation for business disturbance if the closure is unrelated to COVID-19. For instance, states such as ACT, NSW, NT, QLD, SA, and VIC all have provisions requiring landlords to pay such compensation, except where the closure is a reasonable response to an emergency. WA and TAS have similar requirement as the other states, however, do not have an equivalent exception.
It is unlikely that tenants will be able to suspend rent payments under common law, as a short-term change will not necessarily be enough to satisfy the frustration requirements.
Beyond this, the individual lease will need to be considered, and the circumstances of the tenant if the proposed Code or current (or proposed) legislative changes do not apply to them. Whilst some leases may contemplate infectious diseases, frustration or force majeure, many leases remain silent on these issues. In Australia, it is common for a lease to include a clause which allows the tenant a rent abatement in the event the Premises is substantially and/or materially damaged or destroyed. However, it is unlikely that these clauses will apply to a pandemic.
Is the tenant of a lease entitled to terminate the lease in light of the COVID-19 crisis?
Possibly. Whether a party can terminate will depend on:
- the drafting of the relevant force majeure clause (if any);
- the application of the doctrine of frustration to the circumstances of the tenant; and
- the application of any state-based legislation.
At common law, frustration is difficult to prove, as the party must demonstrate that radical changes have caused a fundamentally different situation than what was initially anticipated. This may include following situations:
- changes of law;
- a crucial event not occurring; or
- impossibility of performance.
A short-term change will not necessarily be enough to satisfy the frustration requirements. By analogy, a Hong Kong court rejected a tenant’s claim that a tenancy agreement was frustrated due to an isolation order pertaining to the SARS outbreak which meant that it could not be inhabited for ten days. Similarly, circumstances which may have the effect on performance under a contract becoming slightly more expensive or onerous may not be enough to resist performance of the contract.
Do the measures (laws, orders, regulations, etc.) taken by the national government or any other competent authority in light of the COVID-19 crisis trigger any additional obligations on tenants, or release tenants from any obligation (other than with respect to rent)?
All the tenants which are not forced to close must ensure that their business activity complies with the safety & health requirements imposed under the COVID-19 measures.
The Code proposed by the National Cabinet for adoption by the States and Territories is expected to provide the following releases or additional protections in favour of tenants:
- tenants not being at risk of termination of leases for non-payment of rent (lockouts and eviction);
- tenants will have a freeze on rent increases (except for turnover leases);
- tenants that stop trading or reduce opening hours will not be liable for penalties;
- tenants will not be liable for land tax imposed by landlords (if not already legislated);
- tenants will not be charged interest or unpaid rent by landlords; and
- tenants will not be subject to a claim by the landlord to a bank guarantee or security deposit for non-payment of rent.
Prospective tenants who are foreign persons proposing to enter into certain leases in Australia should also familiarise themselves with changes to foreign investment laws. On Sunday 29 March 2020, the Australian Treasurer announced changes to Australia’s foreign investment review framework in response to the economic circumstances arising from the COVID-19 pandemic. The key changes which have been made to Australia’s foreign investment review framework include:
- Monetary thresholds: reducing the monetary screening thresholds for all foreign investments to AUD 0;
- Approval will be required for leases of developed commercial land for a term of more than five years; and
- Processing times: extending the standard review period for existing and new Foreign Investment Review Board (FIRB) applications to six months. The Treasurer has indicated that this change does not mean that every application will take six months to process. In fact, the Treasurer has indicated that urgent applications for investments that protect and support Australian businesses and Australian jobs will be prioritised.
What should a tenant do to protect its legal position in light of landlords who insist on the payment of rent?
In the first instance, we recommend that tenants read the terms of their lease and any insurance they have taken out (e.g. for business interruption).
Subsequently, tenants should enter into discussions with their landlord to attempt to reach an agreement. If not, tenants may need to pursue further legal action.
Are there any emerging market position/recommendations from professional bodies with respect to tenants obtaining flexibility from Landlords?
A guide to this is yet to be produced. This is subject to change as more details emerge from the National Cabinet and finalised legislation. Professional bodies that provide good general guidance include:
- ACCC (for dealing with consumers) – link;
- ASIC – link;
- Australian government (Business) – link;
- Australian government (Essential Information) – link;
- FIRB – link;
- Franchise Council of Australia – link; and
- Prime Minister of Australia (Media) – link.
We have otherwise set out above details of the particulars of the proposed Code by the National Cabinet.
Do the COVID-19 measures taken by the national government or any other competent public authority allow the tenant to invoke force majeure and avoid the payment of penalties or other contractual remedies foreseen under a forward lease agreement in case the handover obligations are at risk to be missed?
Possibly.
Contractual arrangements between parties may supersede the doctrine of frustration and any relevant state-based legislation, insofar that these obligations can be contracted out of.
If any new legislation were to be introduced, then the legislation may be considered an act of force majeure or frustration in itself.
Nevertheless, it is likely that any legislative changes will override existing obligations. This is because leases often provide that the tenant and landlord must continue to obey the law – however, this matter could be contentious.
Investment & Development
In case of a forward purchase or a forward funding agreement, can the purchaser invoke the COVID-19 crisis as a reason to suspend payments or withdraw from the contract?
Possibly.
This will have to be determined on an ad hoc basis. If a contract or agreement has not been formally executed, any party is entitled to withdraw from the deal. If there is an agreement for lease, development agreement or joint venture, funding agreement or otherwise, consideration will need to be given to any material adverse change (MAC), permitted delay and/or Force Majeure clauses. Whether these are enlivened, and any rights and obligations that arise as a result will depend on the specific drafting of the relevant clause(s).
If there are no clauses or mechanisms in the agreement, common law in relation to frustration need to be considered.
Notwithstanding the above, the usual pre-signing liability and negotiation provisions apply. This includes compensation for pre-lease misrepresentations.
In case of a forward purchase or a forward funding agreement, can the developer invoke the COVID-19 crisis as a reason to request a postponement of agreed delivery dates and thus avoid the obligation to pay penalties related to delay?
Possibly.
As above, the developer should consider any relevant contractual provisions and verify if an express MAC, permitted delay and/or force majeure clause has been agreed. Alternatively, frustration could be available if deadlines are impossible to adhere to, however, frustration will not be available merely because obligations have become more onerous.
Is electronic signature available and practicable for private deeds and notarial deeds?
Whilst agreements can generally be signed in an electronic form, deeds for land generally need to be in writing. As of 3 April 2020, some states are still requiring wet ink signatures. To overcome this, DLA Piper has employed business services to help with the delivery and execution of documents. We suggest the following procedure:
First preference
Full scanned document with ‘wet ink’ signature
The coordinating firm sends the document by email to the remote party with signing instructions. The remote party receives the email and prints out the entire document, signs it with a ‘wet ink’ signature and returns by email a scanned copy of the entire document. Originals follow by post.
Second preference
Scanned signature page with ‘wet ink’ signature (plus full unsigned document)
As above, however, the signatory only sends back a scanned signature page with a ‘wet ink’ signature, together with a copy of the full unsigned document. This approach will be relevant where the document is particularly long and difficult to scan in full.
Third preference
Electronic execution
Deeds should not, for various reasons, be signed electronically unless absolutely unavoidable. (Consider whether it is possible for the deed to be converted to an agreement instead.) Where unavoidable:
- An electronic signature (e.g. digital image file) is applied to the document.
- A full copy of the signed document is printed before exchange and delivery.
- The printed version is marked as an original.
- The signatory (or its lawyers) informs the other parties that the document has been executed in this manner.
- Supporting confirmation of personal authentication is provided by the signatory.
- Review signatory company’s:
- board resolutions;
- corporate constitution; and
- ASIC extract.
Australia
Are construction activities still allowed?
The federal government has broad powers under the Biosecurity Act 2015 (Cth) that would allow them to close construction sites (albeit states and territories would ultimately administer this). As of 3 April 2020, construction work is still considered an essential service, ergo the industry has not closed down. Having said that, construction will be slowed by onerous occupational health and safety standards – such as social distancing. To counter this, some states have extended operation hours to weekends. Failure to abide by these rules could lead to infections and site closures.
If so, what are the restrictions/additional obligations to be respected by the principal/owner of the construction site, if any?
For the construction works which are allowed to continue, the principal/owner of the construction site shall ensure that work health and safety requirements are being adhered to, including social distancing.
Are the COVID-19 measures imposed by the national government or any other competent public authority considered to be an event of force majeure which allow the principal/owner to stop payments to the construction companies?
It is unlikely that payment difficulties will be enough to satisfy frustration – where circumstances become slightly more expensive or onerous is usually insufficient to resist performance of the contract.
Construction contracts should be assessed on an ad hoc basis. Some construction contracts may have force majeure clauses whereas others contemplate legislative changes with ‘change of law’ provisions. However, these clauses may not be satisfied by state issues or directions that are not legislated.
Contractor/construction company perspective
Are construction activities still allowed?
The Federal Government has broad powers under the Biosecurity Act 2015 (Cth) that would allow them to close construction sites (albeit states and territories would ultimately administer this). As of 3 April 2020, construction work is still considered an essential service, ergo the industry has not closed down. Having said that, construction will be slowed by onerous occupational health and safety standards – such as social distancing. To counter this, some states have extended operation hours to weekends.[4] Failure to abide by these rules could lead to infections and site closures.
If so, what are the restrictions/additional obligations to be respected by the construction company/contractor, if any?
For the construction works which are allowed to continue, the principal/owner of the construction site shall ensure that work health and safety requirements are being adhered to, including social distancing.
Are the COVID-19 measures imposed by the national government or any other competent public authority considered to be an event of force majeure which allow the construction company/contractor to stop the construction activities, or request a postponement of agreed completion and delivery dates?
Possibly.
At first instance, the developer should look to any relevant contractual provisions and verify if an express material adverse change (MAC), permitted delay and/or force majeure clause has been agreed. Alternatively, frustration could be available if deadlines are impossible to adhere to, however, frustration will not be available merely because obligations have become more onerous.
Australia
Are the public administrations still open to the public? If not, is there any other way to deal with the public authorities?
As of 3 April 2020, most public administrations still remain open to the public – either physically or remotely. This includes councils, who now meet online in some states.
Do the measures introduced by the national government or any other competent public authority foresee any other change of rules in relation to the process of application for permits, authorizations or any other public approvals required in the field of real estate development and construction?
The process for development applications has undergone considerable transformation. Matters need to be assessed on a state by state and authority by authority basis. For instance, the COVID-19 Legislation Amendment (Emergency Measures) Act 2020 (NSW) allows the NSW Minister for Planning and Public Spaces to order development to go ahead without any planning approval if necessary to protect public health, safety and welfare during the COVID-19 pandemic. Similarly, Queensland has introduced a temporary use license scheme that allows applications to: (a) change existing conditions of an approval; and (b) establish a new use that does not involve physical works.
Financial distress, insolvency and restructuring
Australia
What are the repercussions for continuing to operate my company?
The Australian Government has passed new legislation which provides for a relaxation of the application of the statutory insolvent trading provisions under the Corporations Act 2001 (Cth) (Act) and effectively provides for a six month moratorium against directors having personal liability for trading a company while insolvent (i.e. if it cannot pay its debts as and when they fall due).
The statutory provisions imposing personal liability on directors for insolvent trading (s 588G(2) of the Act) will be held in abeyance so that directors will not be liable for debts incurred by an insolvent company if the debt is incurred during the next six months (or longer period if prescribed) and in the ordinary course of its business during that period. The legislation is silent on debts that are incurred that are not in the ordinary course of the company's day to day business operations.
It is important to note that the moratorium does not apply retrospectively. The moratorium only applies to debts incurred in the next six months after 25 March 2020. It does not apply to debts incurred before 25 March 2020.
Further, it should be noted that other statutory and common law directors' duties still apply.
Do I have to file for insolvency if my company cannot pay all its debts as they fall due?
If a company cannot pay its debts as and when they fall due, then that company is insolvent. Ordinarily, the company should then be put into voluntary administration or straight into liquidation to avoid directors being personally liable for insolvent trading.
However, given the 6-month moratorium on insolvent trading laws detailed above, there is now a little more flexibility. Careful consideration should be given to whether the underlying business of the company will be feasible when the current pressures of the COVID-19 crisis have passed. Professional advice should be sought from an insolvency practitioner and a lawyer who can assist in assessing the position of the company and in appropriately preparing a detailed turnaround plan.
Are there any steps that should be taken to minimise the risk of my actions as director being challenged?
A director may rely on the new temporary safe harbour in relation to a debt incurred by the company if the debt is incurred:
- in the ordinary course of the company’s business;
- during the six-month period starting 25 March 2020; and
- before any appointment of an administrator or liquidator of the company during the temporary safe harbour application period.
A director is taken to incur a debt in the ordinary course of business if it is necessary to facilitate the continuation of the business during the six-month period that began on 25 March 2020. This could include, for example, a director taking out a loan to move some business operations online. It could also include debts incurred through continuing to pay employees during the COVID-19 pandemic.
Directors may wish to document their expenses starting from 25 March 2020 and focus on activities which will continue to keep their business afloat during the next 6 months. Directors have to prove there is a reasonable possibility that the debt was incurred in the ordinary course of business.
Similarly, a holding company may rely on the temporary safe harbour for insolvent trading by its subsidiary if it takes reasonable steps to ensure the temporary safe harbour applies to each of the directors of the subsidiary, and to the debt, and if the temporary safe harbour does so apply. The holding company bears an evidential burden in relation to these matters.
Further, like in the UK, there are a number of steps which directors should consider taking to protect themselves from future criticism:
- prepare a detailed survival or turnaround plan;
- consider whys that the company can minimise its expenses;
- actively engage with its key suppliers, banks and landlords; and
- seek professional advice from insolvency practitioners and lawyers.
Will my company be wound up if I fail to make payments when due?
It is now more difficult for creditors to wind up a company. If a creditor has served your company with a statutory demand on or after 25 March 2020, your company will now have 6 months (previously 21 days) to pay the demanded sum.
Further, from 25 March 2020 the monetary threshold to issue a statutory demand has increased - a statutory demand may only be issued for a debt of AUD $20,000 or more (previously AUD $2,000). If, after 6 months, the debt demanded in the statutory demand has not been paid, the creditor will be entitled to commence winding up proceedings in Court against the company.
You should be open with your company’s creditors in respect of the financial challenges being faced and where possible attempt to negotiate moratoriums or more favourable payment terms, carefully documenting all communications with creditors.
Australia
My company supplies goods and I am concerned about the solvency of my customers. Are there any steps I can take to mitigate risk/my exposure?
In this environment, it is highly likely customers will be unable to pay their debts when they become due. Seek to mitigate those risks early:
- contact your debtors and ask them to pay you even if it is before the due date;
- negotiate periodic payments;
- invoice on delivery of product, without delay; and
- review your sales contracts to determine whether customers can cancel orders. If necessary, update those contracts to limit cancellations.
My company relies upon the supply of goods/services and I am concerned about the solvency of my supplier? Are there any steps I can take to mitigate risk?
In the short run it may be prudent to take steps to mitigate the effects of an insolvent supplier.
These steps may include:
- finding an alternative source of supply;
- extending lead times for customer deliveries;
- halting or limiting new customer orders; and
- thinking about bringing some of the supply capabilities in house
Is there anything else I should look out for?
We haven’t yet seen the new laws play out in practice and navigating the space is going to be unchartered waters for businesses, courts and the legal professionals.
Taxation
Australia
Could the replacement of physical board- and shareholders’ meeting by virtual meetings affect the tax residence of the company, or give rise to a permanent establishment in another jurisdiction?
Under Australian Tax Law a company can be regarded as resident in Australia in various circumstances including being incorporated in Australia, having its central management and control in Australia or its voting power controlled by shareholders who are residents of Australia (provided in the latter two circumstances the company carries on business in Australia). Further, under various of our Double Tax Treaties, companies can be regarded as Australian residents where the place of effective management is located in Australia.
Thus, in the context of both Government and corporate restrictions on international travel, Australian directors that attend board meetings from Australia (i.e. virtual meetings) because of the abovementioned restrictions and collectively influence the decisions of the foreign company, could prejudice the non-Australian resident status of the foreign company.
The Australian Taxation Office (ATO) has been receptive to approaches on these risks and has released a statement on its website that if the only reason for holding board meetings in Australia or directors attending board meetings from Australia is because of COVID-19 and related restrictions, then the ATO should not consider the tax residency of that company to be altered in these circumstances.
Secondly, where foreign based employees of a foreign incorporated company are inadvertently working in Australia (or for extended periods) as a result of COVID-19 and related travel bands, a further permanent establishment (PE) risk arises for the foreign company.
Similar to the above, the ATO has provided in principle guidance on its website that the presence in Australia of employees because they are temporarily relocated or restricted in their travel, should not result in a PE in Australia for the foreign company.
Further, Australian companies with employees “trapped” overseas may create an additional risk of a PE being created in an offshore jurisdiction. This risk will depend on firstly, the Foreign Tax Law and secondly, any applicable Double Tax Treaty.
Finally, foreign companies should be aware of various employee tax and related issues (e.g. withholdings from salary) that may be applicable to foreign employees working inadvertently or for extended periods in Australia. Again, the ATO has provided some further guidance on its website regarding Pay As You Go (PAYG) tax withholdings from salaries.
What could be the tax risks in this respect?
Please see the more detailed comments in other responses regarding the principal tax risks being Australian corporate residency status, permanent establishment risks and related employee disclosure/reporting, withholding and related risks.
Australia
If the employer grants an additional compensation to his employees for the additional costs incurred by homeworking, how is this compensation taxed?
Tax implications for employers
Broadly, the tax implications would depend on the form of additional compensation paid to employees. If employers provide employees with certain equipment/devices to enable them to work from home, these will usually be exempt from fringe benefits tax (FBT). If the additional compensation is in the form of additional salary or bonuses, these will continue to be subject to PAYG Withholding and super guarantee obligations.
Tax implications for employees
Broadly, there are no general concessions on the taxation of additional compensation, and the tax treatment would depend on the form of the additional compensation, e.g. additional salaries or bonuses would be still be subject to tax at the employee’s individual marginal tax rates.
If employees have to temporarily work from home due to COVID-19, they may be able to claim a deduction for expenses incurred relating to that work, which include certain running expenses (e.g. heating, cooling, lighting, cleaning costs and the cost of home office equipment), phone and internet expenses. The work-related proportion of the decline in value of office equipment can also be claimed.
In order to claim these deductions, employees are required to keep written records and documentation to show these expenses and how the claims have been calculated.
What could be the impact of homeworking on employees who work in several countries (salary split)?
In relation to employees who usually live and work in Australia and are only temporarily working overseas because of COVID-19, there is no change to the employer’s PAYG Withholding, FBT and super guarantee obligations.
For employees who are not Australian residents and are working in Australia temporarily as a displaced employee because of COVID-19, employers will normally have the same tax obligations for all employees working in Australia, including PAYG withholding, FBT and super guarantee. However, for certain foreign employees who will not have any Australian tax liability on their employment income earned while in Australia (see section below), there will be no PAYG withholding obligations.
If an employer has paid superannuation on behalf of employees who were temporarily working in Australia because of COVID-19, any superannuation paid on behalf of these displaced employees may be able to be withdrawn (subject to eligibility requirements and taxation) by the employee if they leave Australia permanently, if the following applies:
- they accumulated superannuation while working in Australia on a temporary resident visa issued under the Migration Act 1958 (excluding Subclasses 405 and 410);
- their visa has ceased to be in effect (for example, it has expired or been cancelled);
- they have left Australia; and
- they are not an Australian or New Zealand citizen, or a permanent resident of Australia.
Are there any other wage tax contingencies of potential extended stay of employees abroad or early repatriation?
For employees who usually live and work in Australia and are only temporarily overseas as a result of COVID-19, there will be no change to their Australian tax obligations. If they are required to pay foreign income tax overseas, they will usually be entitled to a foreign income tax offset against their Australian tax payable.
For employees who are not Australian residents and who are staying in Australia for longer than expected because of COVID-19, then they will not become Australian tax residents provided they:
- usually live overseas permanently; and
- intend to return there as soon as they are able to.
For these non-resident employees, their Australian tax obligations will generally remain unchanged. They will not be assessed on income from a foreign source and will remain assessable on income that was already from an Australian source.
For individuals who are working in Australia solely because of COVID-19, who are not intending to stay in Australia, but have not been able to leave, the ATO generally accepts that working in Australia for less than three months will not result in these individuals being assessed for Australian tax (regardless of whether their employer is Australian or foreign). There are also some limited exceptions to employment income being assessable in Australia. These may apply if the individuals have a foreign employer (without an Australian base), the foreign employer is in a country with which Australia has a double tax agreement and the individuals are present in Australia for 183 days or less. There are also some exceptions for foreign government employees.
Australia
How can a (parent) company assist subsidiaries that are in financial difficulties (e.g. parent guarantees, debt waiver; interest free loans, etc.)?
Ways to assist subsidiaries include:
- debt injections or restructures, including – interest-free loans, convertible notes, debt waivers, debt-to-equity swap, derivatives and hedging arrangements;
- equity capitalisation, including – ordinary share issues, preference share issues; and
- other ways, including – providing parental guarantee, cost recharges.
What are the tax consequences (risks) thereof?
For inbound or outbound corporate groups, Australian tax risks arising from the abovementioned financial assistance include:
- thin capitalisation debt gearing limits – a debt gearing limit of debt-to-equity ratio of 60:40, arm’s length debt amount or group’s worldwide gearing limit. If the limit is exceeded, the borrower would be denied some or all of its tax deductions on interest. Cross-border debt and thin capitalisation are recent compliance focus areas of the ATO;
- commercial debt forgiveness tax risks – which would reduce a borrower’s favourable tax attributes (e.g. tax losses, asset tax cost bases and tax depreciation deductions), where debt is waived or swapped for equity, for less than market value;
- tax recharacterisation (under debt/equity rules and hybrid mismatch rules) of the debt or equity instrument, and resulting impact on tax deductibility and withholding tax implications (different rates apply based on Australia’s domestic tax laws and, if applicable, its double tax treaties);
- transfer pricing risks, which requires (and could recharacterise) cross-border transactions to be on arm’s length conditions; and
- increased scrutiny by the ATO (including within the Foreign Investment Review Board (FIRB) approval process, which has a $nil threshold from 10:30 pm (AEST) Sunday, 29 March 2020), particularly on cross-border related party debt transactions (including derivatives and hedging arrangements).
For domestic corporate groups, Australian tax risks arising from financial assistance include commercial debt forgiveness (as mentioned above) and recharacterisation of debt/equity instruments (which could affect the subsidiary’s ability to deduct or frank returns on debt/equity).
Australia
Is it possible to generate additional cash with sale & lease back transactions, an what does that involve?
Given the current economic climate, cash flow is essential to ensure the continued operation of business. To ensure businesses have sufficient liquidity, a sale and lease back transaction may be effective. This transaction involves the disposal of an asset and an immediate lease of that asset from the purchaser.
From a tax perspective, various tax consequences should be considered.
For the vendor, the disposal of an asset requires consideration of the capital gains tax (CGT) rules or if the asset is a depreciating asset, determination of whether a balancing adjustment is required. For a depreciating asset, it may be possible that no taxable gain or loss may arise if the market value of the asset is equal to its terminating value (i.e. its value less the accumulated depreciation).
For capital assets (i.e. land or buildings), a capital gain will arise where the capital proceeds exceed the cost base of the asset. The business will need to report the capital gain in its tax return and pay tax (at the relevant tax rate) generally at the time of lodgement of the tax return. However, businesses may seek to utilise any carry-forward tax losses to reduce any tax payable.
Further, as legal ownership of the asset upon disposal has passed to the purchaser, the vendor (leasee) is no longer entitled to claim tax depreciation (if eligible) on that asset. The right to claim depreciation will rest with the purchaser (lessor) and instead the vendor/leasee would generally be entitled to claim a deduction for the lease payments.
Is there the option to apply for VAT / customs deferment schemes? And how does that work?
Many of the economic stimulus packages introduced by the Australian government and the ATO are administered via the business activity statement (BAS) system.
In addition to the Australian government economic measures, the ATO is also offering support by:
- allowing for payment deferrals of income tax, FBT and excise payments, ceasing interest charges accruing on existing tax liabilities and allow for low-interest payment plans;
- for quarterly payers, allowing for a temporary change in the reporting cycle to a monthly period for goods and services tax (GST) (VAT equivalent) reporting to allow for quicker access to any cash refunds of GST or other credits (i.e. fuel tax credits); and
- varying the PAYG instalments to a lower amount without the ATO imposing any penalties or interest to the varied instalments.
Many of these changes are administered through the tax agent portal, the business portal or via paper forms mailed to the business.
Can ways to mitigate compliance costs be identified (e.g. VAT grouping, corporate income tax fiscal unity)?
Whether a business is a small to medium business entity or a larger corporate group, this may be the appropriate time to consider the grouping rules for both income tax and GST purposes. In the current climate, grouping may allow for improved cash flow as losses of one entity in the group may be used to offset against income of other entities within the same group. The same applies for GST groups, that is, GST credits of one entity within the group may be used to offset against GST payments of another entity within the same group.
Where cash flow is essential, this provides a timing benefit to grouped entities as firstly, it may mean a cash payment to the ATO may not be required and secondly, there is no delay in waiting for the ATO to process a tax refund (which may take up to 14 days).
How can taxpayers check whether it is possible to enhance the VAT position (i.e. additional VAT recovery, pro rata, etc.)?
Taxpayers should speak to their tax advisor to confirm whether they are eligible for any of the economic stimulus measures introduced by the Australian government and the ATO.
Which government stimulus packages are out there, and how can taxpayers apply for these benefits?
The Australian government has introduced a range of economic stimulus measures in response to the COVID-19 situation. Measures are continually being announced and below is a brief summary of the measures relating to cash flows currently announced.
Cash flow support – This measure is targeted towards the small or medium business. To be eligible, the turnover of the business (including connected entities and affiliates) must be less than $50 million, held an active ABN on 12 March 2020 and is an active business. This measure applies to sole traders, partnerships and trusts as long as the above criteria are satisfied.
The Australian Government will provide an initial cash payment of between $10,000 to a cap of $50,000 to these eligible businesses payable from 28 April 2020. The amount of the initial payment is calculated based on the quantum of the business’ PAYG withholding (PAGYW) amount. The amount to be provided as cash flow assistance is calculated as three times the amount reported on the business’ BAS at item W2 (Amounts withheld from payments shown at W1) capped at $50,000. For example, if the PAYGW reported is nil, that business will receive the minimum cash flow support of $10,000 whereas if the PAYGW reported is $15,000, that business will receive three times that amount being $45,000. Businesses do not need to be registered under the PAYGW system to be eligible for this cash flow support.
The same cash benefit initially received will be provided a second time for the periods June to September 2020, paid in either two or four instalments. That is, if businesses received $45,000 as the initial cash support payment, it will receive a further $45,000 over two or four instalments between June and September 2020, meaning a total cash support payment to the business of $90,000.
From a tax perspective, the cash flow support payments are tax free being non-assessable non-exempt income and are not required to be repaid. It is also not subject to GST.
Businesses should be aware that the ATO will review transactions where a scheme has been entered into to allow a business to receive cash flow support payments that it would not otherwise be entitled to.
Instant asset write-off – the Australian Government has increased the instant asset write off threshold to $150,000 (from $30,000) and business with an aggregated turnover of less than $500 million will be eligible to access this measure up to 30 June 2020.
Accelerated depreciation – for depreciating assets with a cost over $150,000, the asset may be eligible for an immediate deduction of 50% of the cost of the depreciating asset plus the normal amount of depreciation calculated on the remaining 50% of the asset’s value up to 30 June 2021.
Both the instant asset write-off and accelerated depreciation measures allow for increased immediate tax deductions for the business allowing for a lower tax liability.
Australia
Our comments below are based on general principles and are not specific to COVID-19. There is currently no updated guidance or concession that has been introduced for the matters below.
Can importation be delayed (e.g., via customs warehousing arrangements)?
Licensed warehouses (e.g. via customs warehousing arrangements) may be used for the longer-term storage of goods that have not yet been cleared for home consumption. The payment of Australian import duty and taxes may also be deferred accordingly.
Broadly, the activities that are permitted in such licensed warehouses exclude ‘value adding’ activities and are limited to certain approved activities only (e.g. storage, blending, unpacking, repacking etc.).
How to best deal with uncollectable receivables (e.g. bad debt relief scheme)?
Uncollectable receivables that constitute a bad debt (and not merely doubtful) may be allowed as a specific or general deduction under Australian Tax Law, upon satisfying certain conditions. Taxpayers that account for GST using the accrual method may also be allowed to claim back a GST credit.
Broadly, the debt must be written off as bad during the income year in which the deduction is claimed. Whether a debt constitutes a bad debt is a question of fact and may vary from one case to another.
For instance, a bad debt may arise where, on an objective view of all the facts, the likelihood of the debt being recovered is unlikely and the taxpayer has taken appropriate steps to recover the debt (e.g. providing reminder notices, attempting telephone/mail contact etc.).
Is there a benefit to be gained by revisiting applied customs classification and customs valuation?
Importers have a legal obligation to correctly assess their goods, including the appropriate tariff / customs classification. The information used for determining the customs value of imported goods must also accurately reflect the price paid or payable for the goods, to ensure that the customs value declared is correct.
For related party pricing, if transfer pricing adjustments result in an increase or decrease in the price of goods, the customs value of the imported goods may also need to be adjusted accordingly.
Penalties may apply if incorrect or misleading information is provided. Further, where the customs value is incorrect, it may also result in an overpayment or underpayment of import duty.
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