COVID-19 is causing changes to our personal and business lives on a day to day basis. Despite this disruption, it’s essential that your company title building takes steps now to ensure it can weather the COVID-19 storm.
Like any other business, company title buildings are reliant on cash flow to keep the building running and well maintained. However, many shareholders are feeling the pinch from having their working hours reduced, being stood down, or even the loss of their employment. Company title buildings can now expect that the usual level of levy payments will significantly reduce, and should plan for a slowdown in cash flow.
Taking active steps to encourage payment
Like all businesses, company title buildings (through their board of directors) should think about introducing measures to encourage shareholders to pay when they can, whilst also applying a softer approach to its debt collection process. This will ensure that the building has sufficient funds to continue to pay its caretaker, pay its utilities, continue with remedial works and keep the company and building running generally.
Below are a some key steps that you, as the responsible Board of Directors, must now think about adopting.
Waiving interest on overdue levies
You may as a Board consider it appropriate to provide some financial relief to a shareholder who is in financial stress. However, you also have an obligation to run the company for the benefit of all shareholders ‘as a whole’ and to only apply the company’s resources for a ‘proper purpose’. Simply forgiving or waiving the outstanding interest on one shareholder’s levies could be seen as favouring that shareholder, which is not allowed. Similar considerations apply if you offer to waive interest on levies to encourage a shareholder to pay the principal amount of the levy.
Unlike strata buildings, the board do not have the benefit of relying on the Strata Schemes Management Act 2015 (NSW) to provide clear guidance on waiving interest or making changes to the usual debt collection process. Instead, you must have reference to your Articles of Association/Constitution and good corporate governance to see what you can do. In this regard, we recommend you adopt a common sense approach to make the necessary, and sometimes hard decisions during this difficult time.
Depending on your Articles of Association, the board may have the power to waive or reduce the interest rate that is triggered when a levy notice is not paid by the due date. Offering to waive or reduce the rate of interest can be a good mechanism to encourage shareholders to make payment of a levy notice as soon as reasonably practicable. But being able to use this ‘carrot’ requires careful implementation to avoid issues down the track for the board.
Our three step approach
We recommend the following approach to ensure consistency and fairness, and to keep the board out of potential hot water down the track.
The board should adopt a formal policy on waiving or reducing interest. To do this you should:
- Review your Articles of Association to confirm that the directors have the power to waive or reduce interest;
- The board should then pass a formal policy that outlines the objective circumstances when interest will be waived. For example, interest may be waived for a shareholder that has lost their job, earns an income of less than $750 per week and can produce reasonable evidence of their reduction in income. The circumstances (including the length of time) should be clearly identified and explained in the policy. The policy should be passed by way of a board resolution at a virtual board meeting; and
- Once a fair and equitable policy has been formulated, the policy should be applied equally to all Shareholders taking the particular circumstances of each shareholder into account.
The benefit of this approach is that the board is then in a position to waive interest only for those shareholders who truly need the help. The board can do this without being accused of favouring a particular shareholder – because this financial relief is available to all shareholders who meet the same necessitous circumstances.
In our view, this three step approach ensures that the board complies with their statutory obligations to exercise their powers for the benefit of the company as a whole and for a proper purpose.
We can help you through each of these steps, with timely assistance, and simple and clear documents.
What about entering into payment plans?
Unlike the Owners Corporation of a Strata Plan, a company title building is not required to obtain the consent of its shareholders when entering into a payment plan with a debtor shareholder. Of course, this position is subject to the Articles of Association/Constitution, and the board must check their governing document. It is also subject to the usual directors’ duties of acting in the best interests of the shareholders as a whole, and for a proper purpose.
Generally speaking, directors are permitted to enter into a payment plan with shareholders on a case by case basis. This informal position should still be applied to shareholders in a consistent manner. While a formal policy may not be required, we still think it is a prudent thing to have in place. In addition, it’s important that directors continue to apply checks and balances to payment plans, including:
- Ensuring that the payment plan is in writing; and
- Ensuring that the payment plan is particularised in terms of the instalments owing and the instalment due dates.
We can help you with a template to record these important details.
Although we have said that a formal policy is not strictly required, in our view it is highly recommended. For the same reasons as set out above about interest waivers, it is important that the board acts in a consistent and fair manner to all shareholders. We can help you draft an appropriate policy for this purpose.
Changes to insolvency law
It is important that directors are aware of significant changes to our regulatory environment. There have been emergency measures introduced to our insolvency laws in light of the COVID-19 crisis, which forces all creditors (including company title buildings) to rethink their debt collection process. You can read about those changes here. In short, the changes mean that a company cannot commence bankruptcy proceedings against a shareholder unless the debt is now greater than $20,000. Previously, bankruptcy proceedings could be commenced against a shareholder who owed a debt of at least $5,000.
Furthermore, a debtor (such as a shareholder) now has 6 months to respond to a bankruptcy notice by either disputing the notice or risk being made bankrupt. Previously, a debtor had only 21 days to respond.
Essentially, changes to bankruptcy laws mean that a company title building cannot compel shareholders to make immediately payment by issuing a bankruptcy notice.
Does this mean that you can’t collect outstanding levies?
Thankfully, no. It just means that collecting debts from a shareholder is now harder to do as threatening immediately bankruptcy is no longer an adequate deterrent. You still have the ability to issue final notices, apply to the courts for a judgement debt, and then use other collection mechanism, such as seizure of assets. This is all very dramatic, and you may not go this far. However, it is important that both the board and shareholders understand that there is no ‘get out of goal free card’ for delinquent shareholders.
Finally, other changes have eased up the duty on directors to avoid the company continuing to trade while it is insolvent. Basically, there is a reprieve from this obligation for 6 months from March 2020. But please be aware that this is temporary, and the last thing the board wants is to go into the later part of this year with a significant arrears in levies and mounting bills to pay on the part of the company.
What to do next
Call Mariam Chalak on 0410 914 128 for assistance putting in place these measures. This includes reviewing your Articles of Association/Constitution to make sure you have the necessary powers to waive interest and enter payment arrangements, and then to put in place a sensible policy to encourage payment and relieve financial stress.
If you would rather get in contact through email, send your questions through to Mariam at firstname.lastname@example.org.