What you need to know now: legal tips
How do the recent changes to trading affect you? On 24 March 2020 a range of businesses were added to those already ordered by the Federal government to close in the interests of public health. Businesses affected by the two consecutive announcements include beauty salons, swimming pools, gyms and indoor fitness centres, restaurants and cafes (although take away and home delivery is permitted).
Many of these businesses are franchised or are independently owned.
The Federal government also introduced on that date a number of bills into Parliament as part of the ‘’Coronavirus Economic Response Package”- these passed into law on the same day and provide a range of relief measures targeted to small business.
While acknowledging the situation is changing daily there are a number of immediate actions and legal issues that business operators need to get on top of and should speak to their lawyer and accountant for detailed information and advice.
For those who manage franchised chains it is important to ensure your franchisees also have the right information and obtain advice.
Standing down staff
If you are ordered to close indefinitely or (in the case of restaurants and cafes) severely restrict operations, you may ‘stand down’ staff without pay if the employee cannot be usefully employed because of a stoppage of work for any cause for which the employer cannot reasonably be held responsible. This includes the current Covid 19 crisis. Fair Work Australia states that employers may be able to stand down employees in these cases:
- if there was an enforceable government order or direction requiring the business to close (which means there is no work at all for the employees to do, even from another location)
- if a large proportion of the workforce was required to self-quarantine with the result that no useful work was able to be performed in the business by the remaining employees/workforce
- if there was a stoppage of work due to lack of supply for which the employer could not be held responsible.
If you have an enterprise agreement there may be additional requirements to be followed.
If you elect to make positions redundant then the usual requirements to pay termination benefits will apply. It is open to have staff agree to take leave owed although again the usual benefits are payable.
Staff stood down should be able to access the announced government benefits in lieu of wages. It is understood that your wages bill to June 2020 will also determine the amount of government tax relief the business itself will receive so that as you reduce wages this relief will decrease proportionately.
If your business is continuing operations it is important that workplace health and safety laws are followed including government advice on precautions for Covid 19.
Changes to insolvency laws
The government has made a number of changes to the insolvency laws which are intended to allow businesses survive this period without being forced into administration, liquidation or bankruptcy.
Directors are temporarily relieved of personal liability for insolvent trading for debts incurred by the company in the ordinary course of the company’s business.
The threshold at which creditors can issue a statutory demand on a company or a bankruptcy notice to an individual has increased so the debt owed must be at least $20,000.
The time period for debtors to respond to a bankruptcy notice or statutory demand is now six months.
This means that it will not be possible for debts to be effectively enforced for the next six months through the usual means of bankruptcy or administration/liquidation.
So if you are owed money it is possible that you won’t be paid for six months and if you owe money, you have much longer to pay it before you risk bankruptcy or insolvent administration.
At the end of this period however (assuming everything reverts to before) creditors should then be able to take action for any debt and the accrued interest and legal costs by using a statutory demand or bankruptcy notice.
Liability for rent
We have heard of many retailers electing to cease rent payments due to their closure or lack of customers. While there was word that the government would prevent termination of commercial leases there is no specific legislation so far on this.
However NSW at least has passed amendments to the Retail Leases Act to permit regulations to prevent landlords terminating leases. We do not have those regulations at the date of this article. We can only assume other states will follow.
Further the provisions in your lease relating to ‘force majeure’(discussed below) may help (if there is such a clause) or laws relating to frustration of contracts or unconscionable conduct may apply.
Much depends on the wording in your lease and whether you are closing ‘voluntarily’ due to a decline in business or by government order.
You should seek legal advice on your particular situation however where the government has ordered the premises to be closed there is likely to be ground to suspend the lease obligations during that period at least.
It is in the interests of tenants and landlords to negotiate a compromise where possible so that when the crisis is over business can resume. Landlords and tenants may also have insurance that responds or there may be government relief available. Any landlord (including a franchisor with a franchisee under a licence or sublease) must heed the insolvency changes flagged above in chasing overdue rent.
The crisis has caused many people to read the force majeure clauses for the first time. These provisions normally operate to excuse contracting parties from their contractual obligations and liabilities while they are prevented from performance (either completely or sometimes partially) by events beyond their control (eg Acts of God, stoppages etc).
Sometimes they allow one or other party to terminate. You need to check all contracts and get advice- leases, franchise agreements, supply agreements and terms of trade. You or the other party may be able to suspend performance of contractual obligations while the crisis continues.
For contracts that do not have a force majeure clause then the option of claiming ‘’frustration’’ may apply. However if used this voids the contract completely rather than just suspend it. Also amounts paid may need to be refunded.
If your customers cannot receive your services then you must not charge them – gym owners should not be allowing direct debits to continue with their members.
If you are not able to put on your conference this year you should consider stopping conference contributions and refunding amounts already paid.
Even where you are not contractually required you may choose to vary your contracts to ensure you have franchisees, suppliers and customers when the crisis is over and trade resumes.
Marketing contribution relief is something several franchisors are considering – you could suspend payments for the time being or even look at winding up the fund and refunding contributions. Royalties can be suspended or reduced for a temporary period although this reduced cash flow will affect the franchisor’s ability to provide services.
For franchisors wanting to terminate franchise agreements the usual rules will still apply but recovery of debts owed are subject to changes noted above.
Finally everyone needs to be aware that the rules of doing business have changed and may change again before this crisis is over – please keep up to date and seek advice before taking serious business decisions.