Australia: Corporate Risks In A GFC World - "Red Flag Issues"

Last Updated: 3 April 2009

The global financial crisis (GFC) will have a significant impact on all businesses.

"Never let a serious crisis go to waste. What I mean by that is that it is an opportunity to do things you could not do before."

Although there is argument about who was the author of this quote, the fact is that for most companies the GFC provides an opportunity for rebirth, doing things better, and avoiding mistakes of the past.

Part of this opportunity is to better manage corporate risk. Gadens Lawyers can provide very valuable, cost effective assistance in this process through our specific "Red Flag" review program we have developed for the GFC climate. Our "Red Flag" review program focuses on the following areas.

Surviving the GFC

Every business needs to identify the key risks to financial survival and develop plans to eliminate or mitigate those risks. Developing a list of "Red Flag Issues" and taking appropriate steps now will provide valuable protection if the slowdown is protracted.

Answer: Gadens Lawyers' Business Structure Group should review your business' commitments to identify Red Flag Issues and work with you to identify strategies to mitigate or remove the risk.

Banking lines

The banking system is under particular stress in the GFC. This can result in banks using 'boilerplate' provisions to increase the cost of money to customers, call for additional security or cash top-ups, or demand early repayment.

The pre GFC practice was to obtain credit easily and to sign loan documents without significant review. The GFC has changed all that and it is now essential that the lifeblood of a business (i.e. its banking lines) is as secure as possible.

Answer: Gadens Lawyers' Banking and Finance Team should conduct a review of your existing facilities and help you negotiate improved terms. New banking lines should be professionally reviewed before signing.

Employment contracts, redundancy and termination

The need to reduce staffing levels has focussed many businesses on their employment contracts and their redundancy and termination practices and policies. Employment contracts and inappropriate practices and policies could be placing businesses at unnecessary risk. In addition, the Fair Work Bill 2009 which is presently before the federal parliament is likely to impose a new host of obligations on employers from as early as July 2009.

Answer: Gadens Lawyers' Workplace Relations Team should conduct an audit of your employment contracts and redundancy and termination practices and policies now.

Appropriate insurance

The cheapest insurance premium may equate to inadequate cover. How well are you covered for directors' and officers' liability, professional indemnity insurance, public liability, and fraud?

Answer: Gadens Lawyers' Corporate Risk and Insurance Group should review your key insurance policies now.

Proportionate liability

All Australian states and territories now have proportionate liability legislation. The legislation will have a major impact on the way litigation is conducted in Australia.

Before proportionate liability legislation, an aggrieved party could often obtain compensation for all its loss from a contractor who had breached its contract. This created the practice of pursuing the contractor with the deepest pockets or the best insurance. However, under proportionate liability, where the loss is only partly caused by the default of the contractor, that contractor will only be liable for the proportion of loss caused by that contractor's default.

Courts have a huge hand in determining that proportion. For example, a company which loses money because of poor work by a builder, a valuer, and a lawyer may only be able to recover a proportion of the loss from each of these contractors.

As a result, there is an increased risk that anybody involved in a transaction that has gone off-the-rails will be sued.

Answer: Gadens Lawyers' Regulatory and Compliance Team should review your key contracts to minimise the risk of exposure to legal claims, and maximise your recourse against defaulting parties.

Climate change

A substantial burden has been placed on corporate groups to understand their new obligations and rapidly adapt their business procedures to deal with new mandatory schemes such as the National Greenhouse and Energy Reporting Scheme (NGER Scheme). Companies also need to position themselves to take advantage of carbon trading opportunities fuelled by the impending Carbon Pollution Reduction Scheme (CPRS).

Banks who take security over affected businesses may find themselves liable if they enter possession or appoint a receiver.

Assessing whether and the extent to which corporate groups are "on the hook" for reporting obligations is complex, as the tests relate to day to day control of facilities and not necessarily ownership. The analysis requires an appreciation of very specific tests set out in the NGER Scheme and a consideration of various contractual arrangements (including leases, licenses, facilities management contracts, joint venture agreements, and development and services contracts and the like). What does your company control?

Answer: Gadens Lawyers' Climate Change Team should conduct an audit of your climate change responsibilities now and alert you to CPRS opportunities.

Stalled development works

The GFC has resulted in an increased number of properties and building projects being placed in receivership mid-project or with complex development issues. The consent could lapse or the council could issue remedial orders if there are delays or failure to comply with the approval's terms. Failure to comply with orders is a criminal offence, and can expose receivers or mortgagees in possession to the risk of large penalties.

Answer: Gadens Lawyers' Planning, Environment and Government Team should review the status of consents on properties, and can assist you in navigating the development process and liaising with authorities such as councils.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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